Market Unwind: How Softer US Data Is Reshaping Currency and Commodity Dynamics

The US Dollar Index slipped to its lowest point in over two months on Tuesday, closing down 0.21%, as a wave of mixed economic signals shifted investor expectations around Federal Reserve policy. Employment figures came in stronger than anticipated—November nonfarm payrolls added 64,000 jobs against forecasts of 50,000—yet this strength couldn’t offset deteriorating labor market breadth and wage growth deceleration.

The Dollar’s Downward Pressure: What’s Really Driving the Move?

Three converging forces have combined to weigh on the Dollar Index. First, the Fed’s recent shift toward policy ease is reshaping rate expectations. The central bank’s decision to inject $40 billion monthly into T-bill purchases, which commenced last Friday, signals a pivot toward supporting market liquidity rather than restricting it. Second, wage pressures are cooling faster than officials initially expected. November average hourly earnings rose just 0.1% month-on-month and 3.5% year-on-year—both misses against consensus forecasts of 0.3% and 3.6% respectively. The 3.5% year-on-year reading marks the smallest increase in 4.5 years, suggesting inflation normalization and reducing the urgency for continued monetary tightening.

Third, political uncertainty around future Federal Reserve leadership has introduced a bearish undertone for the Dollar. Reports indicate that President Trump plans to announce his choice for the next Fed Chair in early 2026, with market sources suggesting a dovish-leaning candidate may be selected. Such an appointment would likely reinforce expectations of sustained rate cuts through 2026, weighing on the currency’s safe-haven appeal.

Additional economic releases reinforced the softer narrative. October retail sales showed no month-on-month change against expectations of a 0.1% gain, though the ex-autos measure rebounded with a 0.4% advance. Meanwhile, December S&P manufacturing PMI contracted to 51.8, a five-month low, missing estimates of 52.1. These readings collectively signal an economy at an inflection point—still growing, but at a decelerating pace.

Market pricing reflects these dynamics. Derivatives traders are currently assigning just a 24% probability to a 25 basis point Fed rate cut at the January 27-28 policy meeting, suggesting cautious positioning ahead of the central bank’s next decision.

EUR/USD Bounces as Eurozone Divergence Deepens

The euro posted modest gains of 0.02% against the weakening Dollar, climbing to a 2.5-month high. The strength is rooted in two competing dynamics within the Eurozone. German business sentiment unexpectedly jumped to a five-month peak in December, with the ZEW survey’s economic expectations component rising 7.3 points to 45.8—well above forecasts for a decline to 38.4.

However, this optimism is being tempered by underlying manufacturing weakness. The Eurozone’s December S&P manufacturing PMI contracted at an unexpected pace, sliding 0.4 points to 49.2 and marking the steepest contraction seen in eight months. The miss against expectations of a rise to 49.9 underscores persistent regional economic softness.

From a monetary policy perspective, the ECB appears to be approaching the end of its easing cycle. Market derivatives are pricing zero probability of a 25 basis point rate cut at Thursday’s policy meeting, suggesting the central bank has largely exhausted its rate-cutting potential. This contrasts sharply with Fed expectations, where multiple cuts are still anticipated through 2026. The divergence in central bank trajectories continues to provide support for the euro, despite evidence of industrial sector strain.

Yen Strengthens on BOJ Rate Hike Bets and Risk Reversion

The yen gained ground against the Dollar, with USD/JPY declining 0.37% as investors rotated into the Japanese currency on expectations of imminent rate increases. The Bank of Japan is widely expected to raise rates by 25 basis points at Friday’s policy meeting, with derivatives pricing a 96% probability for the move.

Supporting this bets, Japan’s December S&P manufacturing PMI expanded to a six-month high of 49.7, rising 1.0 points from the prior month and suggesting relative economic resilience compared to its Eurozone and US counterparts. The yen also drew safe-haven demand from disappointing US and global growth signals, as traditional risk-off flows benefited the currency.

Precious Metals Navigate Mixed Signals

February COMEX gold declined $2.90 to close down 0.07%, while March COMEX silver fell $0.266 or 0.42%, as competing forces created an uncertain near-term environment.

Headwinds for the Precious Metals Complex: Gold faced selling pressure as the 10-year breakeven inflation rate dropped to a two-week low, reducing demand for the metal as an inflation hedge. Lower inflation expectations typically reduce the urgency for investors to own hard assets as purchasing power protection. Silver, too, came under pressure as weak US manufacturing data and steep Eurozone contraction signaled slowing global industrial activity, weighing on demand for the industrial metal.

Expected BOJ rate hikes also created near-term headwinds, as higher rates in Japan typically reduce demand for non-yielding precious metals in that region and can encourage carry-trade unwinding, which historically pressures commodities priced in dollars.

Support Structures Remain Intact: Despite Tuesday’s declines, several structural supports underpin precious metals demand. Central bank demand remains robust, with China’s PBOC reserves rising by 30,000 ounces in November to 74.1 million troy ounces—now marking thirteen consecutive months of reserve accumulation. Global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2, reflecting sustained institutional appetite.

Silver is particularly well-supported by tight global supply dynamics. Shanghai Futures Exchange warehouse inventories fell to 519,000 kilograms on November 21, the lowest level in a decade, signaling supply constraints that could underpin prices if industrial or investment demand rebounds.

Long liquidation pressures—stemming from the unwinding of leveraged positions as ETF holdings fell from three-year peaks reached on October 21—have weighed on the complex since mid-October. However, recent data shows silver ETF long positioning rebounded to nearly a 3.5-year high on Monday, suggesting renewed fund interest and potential stabilization ahead.

The Dollar Index’s decline to a 2.25-month low provides a technical tailwind for commodities priced in USD, potentially offsetting some near-term headwinds. Additionally, ongoing uncertainty over potential US tariffs and geopolitical tensions spanning Ukraine, the Middle East, and Venezuela continue to support safe-haven and portfolio diversification demand for precious metals.