The US Dollar Index (DXY) eased to about 96.80 in Asian trading on Thursday, measured against six major currencies. US weekly Initial Jobless Claims are due later on Thursday, while the CPI inflation report is due on Friday.
December Retail Sales came in below forecasts on Tuesday, and comments on Monday from White House economic adviser Kevin Hassett also weighed on the index. He said job gains could slow in coming months due to slower labour force growth and higher productivity.
Labor Data And Fed Tone
US labour data on Wednesday offered support for the dollar. The Bureau of Labor Statistics reported 130,000 jobs added in January versus a 70,000 consensus, while the Unemployment Rate fell to 4.3% from 4.4%, beating a 4.4% forecast.
Cleveland Fed President Beth Hammack said the Unemployment Rate is stabilising after the January nonfarm payrolls report. Kansas City Fed President Jeff Schmid said rates should remain restrictive to keep downward pressure on inflation, and he said there are few signs of restraint in the data.
Markets now price a nearly 94% chance of no Fed rate change at the next meeting, up from 80% the prior day, according to CME FedWatch.
This time last year, we were looking at a soft US Dollar Index near 96.80, trying to make sense of mixed signals. We saw slower retail sales, but the January 2025 jobs report surprised many by adding 130,000 positions. Back then, the focus was on whether the Federal Reserve would keep rates high to fight inflation.
Shifting Outlook For Rates
Fast forward to today, and the conversation has completely changed. With headline inflation cooling to 2.1% in the latest January 2026 report, the battle against price rises seems largely won. Now, the main concern is slowing growth, a direct result of those restrictive policies held throughout 2025.
We just saw the January 2026 jobs report come in at a much softer 85,000, with the unemployment rate ticking up to 4.5%. This is a stark contrast to the labor market strength we saw a year ago. This economic weakness gives the Fed a clear reason to consider easing policy sooner rather than later.
Unlike last year’s 94% certainty of the Fed holding rates, the CME FedWatch Tool now shows a 65% probability of a rate cut by the June 2026 meeting. This pivot means derivative traders should prepare for increased volatility in interest rate futures and currency pairs like EUR/USD. Buying straddles or strangles on dollar-related assets could be a prudent way to play the uncertainty around the exact timing of the first cut.
