The Dollar’s Dominance, EUR/USD Struggles, and GBP Pressures.

USD: Strong Dollar Momentum Holds Steady

Global markets have seen a boost in the past 24 hours, driven by a slightly softer-than-expected US core CPI reading for December. Short-term US yields dropped by 10 basis points (bp), as inflation appears stable but not worsening. Despite this, both headline and core inflation near 3% year-over-year (YoY) keep doubts about the Federal Reserve’s ability to cut rates this year. Markets are pricing in only 36bp of rate cuts for 2025, and ING’s economist James Knightley anticipates any easing will likely be delayed further.

Today’s focus is on US retail sales for December, expected to show continued strength. The Fed’s Beige Book recently highlighted robust holiday sales across most districts, exceeding expectations. Weekly initial jobless claims remain notably low, supporting dollar strength.

The main event today, however, is Scott Bessent’s Senate Finance Committee hearing at 16:30 CET. Bessent, described as a “conservative mainstreamer,” aims to maintain the dollar’s role as the dominant reserve currency, support permanent tax cuts from the 2017 TCJA, and advocate for tariffs as a negotiation tool. While markets expect Bessent to provide a measured approach to tariffs, his remarks today are unlikely to hint at significant changes.

With the inflation-adjusted dollar index at its highest level since 1985, Bessent is unlikely to favor a weaker dollar narrative. Any mention of trading partners strengthening their currencies may introduce an outside risk. Overall, the dollar remains poised to stay strong, with the DXY potentially revisiting 110 before Monday’s inauguration-related event risks.

EUR: Struggling to Break Free from Underperformance

EUR/USD continues to underperform despite short-term rate differentials suggesting it should trade closer to 1.05. ING’s Financial Fair Value model aligns with this view, yet EUR/USD struggled to sustain a rally beyond 1.0350 after softer US CPI data yesterday.

This lack of momentum reflects skepticism about the eurozone’s prospects, including weak economic growth and leadership. Speculative positioning in the euro appears less extreme compared to currencies like CAD, AUD, and NZD, signaling potential downside for EUR crosses if Trump’s tariff policies surprise markets next week.

In the near term, EUR/USD could retest 1.0225/50 as the strong dollar environment persists, although buying interest may emerge at those levels ahead of Monday’s anticipated developments.

GBP: Under Pressure Amid Slowing Growth

The Pound Sterling is facing selling pressure following mixed UK economic data for November. GDP grew by 0.1% after a 0.1% contraction in October, but the figure fell short of the expected 0.2%. Industrial and manufacturing production also declined month-on-month by 0.4% and 0.3%, respectively, further signaling weakness in UK factory activity.

Producers remain cautious about ramping up capacity, fearing weaker demand ahead of potential global tariffs under President-elect Trump. However, expectations for a more dovish Bank of England (BoE) stance offer some relief. Traders now see an 84% probability of a 25bp rate cut to 4.5% in February, spurred by cooling UK inflation data for December.

Falling price pressures have also eased UK gilt yields, with 30-year yields dropping to 5.28% from a 26-year high of 5.47%. Nevertheless, concerns over the UK’s economic outlook continue to weigh on the British currency, which remains under downward pressure.