The past week in the Forex market saw significant volatility as traders digested key economic data, central bank commentary, and geopolitical developments. Here’s a breakdown of the major events and their impact on currency pairs:
1. US Dollar (USD): Strong Retail Sales Bolster the Greenback
The USD regained strength last week after stronger-than-expected retail sales data for December showed a 1.4% month-over-month increase, far exceeding the forecast of 0.8%. This reinforced the narrative of a resilient US economy despite ongoing rate hikes by the Federal Reserve.
- Impact:
- EUR/USD dropped below the 1.0800 mark as hawkish Fed rhetoric combined with upbeat data supported the dollar.
- GBP/USD slid to 1.2300, with additional pressure from mixed UK data.
The Fed’s Beige Book released midweek emphasized continued economic resilience but noted some regional slowdowns, fueling speculation that the central bank might remain data-dependent in its March decision.
2. Euro (EUR): ECB Hawks Push Back
The euro struggled against the USD but held its ground against other majors as European Central Bank (ECB) officials hinted at further tightening to combat persistent inflation. Industrial production in the Eurozone surprised to the upside, with a 1.3% monthly increase in November, but this was overshadowed by weaker German GDP projections for 2025.
- Impact:
- The ECB hawkish tone limited losses for the euro against risk-sensitive currencies like the Australian dollar (AUD) and Canadian dollar (CAD).
- EUR/GBP rallied slightly to 0.8850 as the pound faced its own set of challenges.
3. British Pound (GBP): Mixed Economic Data Weighs
The pound came under pressure as inflation eased to 4.8% year-over-year in December, a significant drop from 5.4% in November. While this gave the Bank of England (BoE) some room to pause rate hikes, weaker-than-expected retail sales (-0.5% MoM) dampened sentiment further.
- Impact:
- GBP/USD fell below 1.2300.
- GBP/JPY experienced volatility, closing the week near 185.00 after touching a weekly high of 187.00.
4. Japanese Yen (JPY): BoJ Leaves Policy Unchanged
The Bank of Japan (BoJ) maintained its ultra-loose monetary policy, keeping the yen under pressure against most majors. However, Governor Ueda’s comments hinted at a potential policy adjustment later this year, which led to short-term volatility.
- Impact:
- USD/JPY initially rallied to 130.50 before retracing slightly to 129.80 on Friday.
5. Commodity Currencies (AUD, NZD, CAD): Influenced by Risk Sentiment
- The Australian dollar (AUD) faced selling pressure after weak Chinese industrial production data raised concerns about Australia’s largest trading partner. AUD/USD dropped to 0.6650.
- The New Zealand dollar (NZD) was impacted by disappointing dairy auction prices, with NZD/USD declining to 0.6150.
- The Canadian dollar (CAD) held steady despite a pullback in oil prices, with USD/CAD hovering around 1.3450.
6. Key Themes to Watch
- Geopolitics: Rising tensions in Eastern Europe added to market jitters, driving flows into safe-haven assets like the USD and JPY.
- Central Bank Guidance: Hawkish comments from Fed officials contrasted with dovish undertones from other major central banks, setting the stage for further divergence in monetary policy.
Conclusion: The Week Ahead
The Forex market’s focus will shift to next week’s PMI data, central bank meetings, and any surprises in the US PCE inflation report. With sentiment-driven moves dominating recent price action, traders should remain cautious and monitor key levels closely.
