Markets Open Week on Softer Dollar (16–20 February)

Global markets opened the week in thin trading conditions as US markets remained closed for Presidents’ Day. The US dollar stayed under pressure, hovering just below the 97 level, following last week’s softer inflation data that reinforced expectations for Federal Reserve rate cuts later this year.

Headline US CPI slowed to 2.4% year-on-year, below forecasts, while monthly inflation eased to 0.2%. Earlier labor data showed solid payroll growth and a surprise decline in unemployment, pointing to a stabilizing, though gradually cooling, labor market.

Risk sentiment remained mixed across regions. In Europe, weaker UK growth data weighed on sterling and gilt yields, while the euro stayed supported by the ECB’s relaxed stance toward recent currency strength. In Asia, disappointing Japanese growth figures capped yen gains and kept bond yields elevated as markets assessed the fiscal outlook following Prime Minister Sanae Takaichi’s recent election victory.

Commodity markets were shaped by shifting rate expectations and geopolitical developments. Gold pulled back slightly after a strong rally last week, while silver softened amid uncertainty around the Fed’s near-term policy path.

Market Drivers & Catalysts

• Cooling US Inflation: January CPI data undershot expectations, reinforcing bets on Fed easing later this year, though policymakers are still expected to hold rates in March and April.
• Fed Rate Expectations: Markets are pricing around 61 bps of rate cuts in 2025, with June seen as the most likely timing for the first 25 bps move.
• Weak UK Growth Data: UK GDP expanded just 0.1% in Q4 2025, missing forecasts and signaling a fragile recovery, increasing pressure on the Bank of England to ease policy.
• Japan Growth Disappointment: Japan’s economy grew only 0.1% q/q in Q4 2025, undershooting expectations and highlighting weak domestic demand.
• Geopolitical Focus: Ongoing US–Iran talks and early-stage negotiations to end the war in Ukraine continue to influence energy markets and risk sentiment.

Fixed Income

• US 10-Year Treasury: Yields fell to 4.07% on Friday, the lowest level since early December, after softer CPI data supported rate-cut expectations. Markets now price around 61 bps of easing this year, up from 58 bps previously. March remains priced as a hold, with June the favored start for cuts.
• UK 10-Year Gilt: Yields held below 4.5%, their lowest since January 22, as weak Q4 growth and contracting industrial and construction output weighed on sentiment.
• Japan 10-Year Government Bond: Yields remained near 2.2% as investors digested disappointing Q4 growth. Prime Minister Takaichi reiterated plans for growth-supportive fiscal measures, including a two-year cut to the 8% food sales tax, while pledging not to issue new bonds to fund the gap.

Commodities

Gold slipped below $5,030 per ounce on Monday after rallying more than 2% in the previous session. The pullback followed profit-taking after softer US CPI data strengthened expectations for Fed rate cuts later this year.

Silver drifted toward the $75 area as easing inflation failed to trigger additional dovish repricing. The Fed is still seen as unlikely to cut rates in March or April, though geopolitical risks could revive safe-haven demand.

Currencies

• U.S. Dollar Index (DXY): Hovered just below 97 amid thin holiday trading. The dollar remains pressured by cooling inflation and rising expectations for rate cuts later in the year.
• Euro: Traded near $1.19, on track for a roughly 0.4% weekly gain, supported by ECB comfort with recent strength and mixed US data.
• British Pound: Held near $1.36 as weak UK growth data and a dovish Bank of England outlook weighed on sentiment.
• Japanese Yen: Slipped toward 153 per dollar after last week’s gains, pressured by disappointing Q4 growth and weak consumer spending.

Economic Data Highlights

• US CPI (MoM, Jan): +0.2%, slightly below expectations, signaling easing near-term inflation pressures.
• US CPI (YoY, Jan): Slowed to 2.4% from 2.7%, reinforcing the cooling inflation narrative.
• US Core CPI (MoM, Jan): +0.3%, in line with forecasts, indicating underlying inflation remains sticky.
• US Initial Jobless Claims: Rose to 227K, slightly above expectations, pointing to mild labor market cooling.
• US Existing Home Sales (Jan): Fell to 3.91 million, below forecasts of 4.16 million, highlighting continued housing market weakness.
• US Nonfarm Payrolls (Jan): Increased by 130K, well above forecasts of 66K, showing stronger labor momentum.
• US Retail Sales (MoM, Jan): Flat at 0.0%, missing expectations of a 0.4% rise.
• US Core Retail Sales (MoM, Jan): Also flat at 0.0%, versus expectations of a 0.3% increase.

Macro Calendar Highlights

• Federal Reserve rate expectations and Fed speaker commentary
• Ongoing US–Iran diplomatic talks
• Developments in Ukraine-related negotiations
• Upcoming US macro data releases following holiday delays