Dollar declines to four year lows ahead of Fed decision

Trump's FX comments sink the USD to 4-year lows. GBP hits 51-month highs on inflation spikes. EUR breaches 1.2000 as trade tensions thaw. Markets now pivot to the FOMC decision today.

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Sterling breaches key resistance as dollar collapses

Cable cleared 1.3800 to touch 1.3869 in the previous session, the highest level in 51 months. The pair remains firm around 1.3796 on Wednesday.

Fresh data from the British Retail Consortium (BRC) shows shop prices rose 1.5% YoY in January, double the forecast. The print marks the fastest pace since February 2024, reigniting inflation concerns that could constrain Bank of England (BoE) rate cuts. UK 10-year gilt yields held firm at 4.5% as bond markets priced in a more hawkish BoE trajectory.

Cable is testing levels not seen since 2021. The pair broke through the mid-2025 resistance zone, Bidders have returned with conviction, capitalising on broad-based dollar weakness.

The 1.4000 mark remains as the next hurdle. One-sided rallies in GBP/USD often invite sharp reversals and remain a key risk for positioning. A break below 1.3800 could trigger profit-taking toward those moving averages.

With Cable testing 1.4000, this psychological barrier has historically acted as a key benchmark for institutions evaluating their forward cover ratios.

The Pound’s 1.2% surge in the previous session poses a headwind for price competitiveness. If the pair breaches 1.4000, exporters might see further erosion of USD-denominated revenue.

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Euro consolidates as "Sell America" theme persists

EUR/USD retraced from multi-year highs above 1.2000, settling near 1.1990 after four consecutive days of gains but the upside bias remains intact. The pair remains driven almost entirely by dollar dynamics rather than eurozone fundamentals.

Sentiment shifted after President Trump dialled back tariff threats linked to the Greenland dispute. Markets viewed this as a de-escalation signal, allowing EUR/USD to reach its highest point since the summer of 2021.

ECB policy direction remains unclear, with tentative signs of recovery in the Eurozone economy suggesting that any improvement will likely be gradual. If the Fed offers clearer guidance on easing today, the Euro could see a clean breakout above the 1.2000 psychological mark.

Risk-on flows dominate. For EUR Importers as long as the pair holds above 1.1950, the buying power for USD-priced goods remains historically strong.

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Dollar declines as Trump signals "greenlight" for selling

The US Dollar Index (DXY) slumped to a 4-year low at 96.00, after President Trump described the dollar's value as "great" when questioned about recent USD weakness. Markets view this as a calculated effort to keep the economy running above trend ahead of the midterms, greenlighting a sustained dollar sell-off. This has propelled risk-sensitive currencies and safe havens alike, with the Euro, Yen, and Sterling all recording multi-year peaks.

Markets are now questioning the Fed's independence amid reports of a DOJ probe into Chair Powell. All eyes remain on today's interest rate decision.

Yen gets further boost amid intervention chatter

USD/JPY consolidated at 152.79 on Wednesday after tumbling to three month lows at 152.10 on Tuesday, as intervention speculation intensified following Trump's currency remarks.

Japanese Finance Minister Satsuki Katayama stated the government would take "appropriate action" on FX if needed but declined to comment on the yen's spike. Markets remain skeptical about the effectiveness of intervention given Prime Minister Takaichi's stimulus-heavy snap election campaign ahead of February 8.

Meanwhile AUD/USD holds near 0.7000. Australia’ December CPI hit 3.6% YoY, matching forecasts and reinforcing the Reserve Bank of Australia (RBA)'s hawkish stance.

The USD/CAD pair reclaimed 1.3600 as traders positioned ahead of today's Bank of Canada (BoC) and Fed rate decisions. Rising crude oil prices provide a floor for the Loonie, capping USD recovery attempts. Investors remain focused on the "Sell America" theme, which is likely to persist unless the Fed provides a more hawkish outlook this evening. Markets still price two Fed cuts for 2025, though today's FOMC guidance will prove critical for near-term USD/CAD dynamics.

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Markets look ahead:

Today (Wednesday): Federal Reserve rate decision and Fed Chair Powell press conference; Bank of Canada policy announcement.

Friday: US GDP, Employment Data

Feb 8: Japan Snap Election

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Market Summary:

Cable broke four-year highs to 1.3869 on UK shop price acceleration and broad dollar weakness.

EUR/USD consolidated near 1.2000 after touching multi-year peaks. Dollar collapsed to four-year lows after Trump dismissed weakness concerns.

USD/JPY hit three-month lows at 152.10 on intervention speculation before consolidating at 152.79.

AUD/USD trades near 0.7000 as CPI data reinforces RBA hawkishness.

USD/CAD recovered above 1.3600 ahead of dual central bank decisions, supported by rallying crude oil.

Markets focus on Fed guidance today determines dollar trajectory across majors. Focus also remains on Fed chair commentary regarding political pressure, central bank independence and policy path. BoC policy decision today and US Friday employment data add volatility layers. Watch for hawkish surprises that could reverse greenback selling.

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