Dollar Firms Ahead of CPI Release, Pound Struggles to Regain Ground

The U.S. dollar strengthened on Monday, remaining at elevated levels following robust U.S. payroll data, while the British pound faced continued pressure, extending recent losses.

In early trading, the dollar index, which tracks the U.S. currency against a basket of six other currencies, was trading 0.4% higher at 109.930, after reaching its highest level on record in October 2022 on Friday.

Dollar Maintains Strength on CPI Expectations

The dollar found support from last Friday’s U.S. labor market data, which revealed unexpectedly strong job growth in December and a decline in the unemployment rate to 4.1%. This data has led traders to reassess their expectations for Federal Reserve rate cuts this year.

Markets are now pricing in 27 basis points of Fed rate cuts in 2025, compared to approximately 50 basis points at the start of the year.

“The strong U.S. jobs data released on Friday has further bolstered the U.S. dollar,” ING analysts noted in a report. “It is difficult to envision the dollar’s trend reversing this week, especially ahead of another anticipated set of robust U.S. inflation data, which could dampen expectations of Fed rate cuts.”

The U.S. Consumer Price Index (CPI) report for December, due on Wednesday, is expected to further shape rate expectations. Any upside surprises in inflation figures could reinforce the Fed’s stance, potentially closing the door on near-term rate easing.

Pound Faces Persistent Weakness

In Europe, GBP/USD fell 0.7% to 1.2117, marking 14-month lows following a 1.8% decline last week amid rising concerns over the UK’s financial outlook, which has led to increasing borrowing costs.

“Sterling continues to trade lower, and its losses could deepen this week,” ING analysts added. “Wednesday will be crucial for the pound as UK December CPI data is released. Regardless of the figure, the pound could face further pressure.”

Persistent inflation and its implications for the Bank of England’s monetary policy cycle could exacerbate issues in the UK gilt market, adding to sterling’s woes.

Meanwhile, EUR/USD edged down 0.1% to 1.0195, its lowest level since October 2022. The European Central Bank is anticipated to cut interest rates by approximately 100 basis points in 2025, with most reductions expected in the early months of the year. This outlook aligns with expectations of inflation aligning with the ECB’s 2% target by mid-year.

“With U.S. interest rates rising and the dollar performing well (+8% since the end of September), it would not be surprising if central bankers were less inclined to defend their currencies,” ING noted.

However, in a speech in Hong Kong, ECB Chief Economist Philip Lane suggested that without further rate cuts, achieving the ECB’s inflation target would be jeopardized. This indicates the ECB is not overly concerned with the euro’s softness against the dollar, even as parity discussions intensify.

Yuan Struggles for Stability

In Asia, USD/JPY fell 0.3% to 157.23 amid subdued volumes due to a Japanese holiday, while traders remain cautious ahead of the Bank of Japan’s upcoming meeting.

USD/CNY rose 0.3% to 7.3574, despite data showing that China’s trade balance grew more than expected in December, fueled by a surge in exports. However, the data largely reflected exporters rushing shipments ahead of anticipated U.S. tariffs.

President-elect Donald Trump, who will be inaugurated on January 20, has reiterated his pledge to impose steep tariffs on Chinese goods starting from the “first day” of his second term. This looming policy is expected to weigh heavily on the yuan in the near term.