Forex Today: US Dollar consolidates weekly gains amid a cautious mood

Here is what you need to know on Friday, January 19:

The tech rally-led risk-on sentiment on Wall Street failed to extend in Asian trading on Friday, as the Middle East geopolitical tensions heated up alongside persistent Chinese economic worries. The US Dollar eased, despite a cautious market mood, as investors weighed the US Federal Reserve’s (Fed) rate cut outlook.

Fresh reports hit the wires earlier this morning that Iran-backed Houthi terrorists launched two anti-ship ballistic missiles at M/V Chem Ranger, a Marshall Island-flagged, US-Owned, Greek-operated tanker ship. This comes after the United States (US) launched new strikes against Houthi anti-ship missiles aimed at the Red Sea on Thursday.

On Thursday, the US weekly Initial Jobless Claims fell to their lowest level in nearly 1-1/2 years, suggesting tighter labor market conditions and tempering the odds for a March Fed rate cut. The probability for a March Fed rate cut is now below 60%, the CME Group’s FedWatch Tool showed, as against a roughly 75% chance seen at the start of the week. 

The US Treasury bond yields hit fresh multi-week highs on strong US data and hawkish Fedspeak, which continued to push back against the market’s expectations of a rate cut as early as March. Atlanta Fed President Raphael Bostic said on Thursday that the “baseline is for rate reductions sometime in Q3, but care is needed to not to cut soon or risk a refreshed price spiral.”

At the time of writing, the US Dollar Index is down 0.09% on the day at 103.45 while the benchmark 10-year US Treasury bond yields are rising 0.75% so far to refresh five-week highs near 4.18%.

The next near-term direction in the US Dollar will be determined by the upcoming top-tier US UoM Consumer Sentiment data and Fedspeak. The Fed begins its ‘blackout period’ on Saturday ahead of the January 31- February 1 policy meeting. Additionally, the end-of-the-week flows and the repositioning ahead of next week’s fourth-quarter GDP report from the US will play a pivotal role.

Across the FX board, AUD/USD is trading neutral near 0.6570 after testing 0.6600 on a firmer Chinese Yuan. NZD/USD is posting sizeable losses to trade below 0.6100 after New Zealand's Business Performance of Manufacturing Index (PMI) contracted further to 43.1 in December, down from November's 46.7.

USD/JPY is sitting close to multi-month highs of 148.81, as soft Japanese CPI data poured cold water on any expectations of hawkish policy hints from the Bank of Japan (BoJ) when they meet next week to decide on its policy.

EUR/USD is consolidating losses below 1.0900, somewhat supported by the ongoing pushback by the European Central Bank’s (ECB) policymakers against interest rate cuts and a broadly subdued US Dollar. ECB President Christine Lagarde’s speech in Davos on the Global Economic Outlook will be closely eyed.

GBP/USD is dropping toward 1.2650, undermined by the bigger-than-expected decline in UK Retail Sales. The UK Retail Sales fell 3.2% MoM in December vs. -0.5% expected and 1.4% booked in November, the official data published by the Office for National Statistics (ONS) showed on Friday.

USD/CAD is holding lower ground below 1.3500, as the WTI oil is sitting at fresh five-day highs of $74.20. The geopolitical developments between the US and the Iran-back Houthi rebels fuel supply disruption concerns, rendering positive for the black gold.