Dollar Weakens As Fed Easing Expectations Rise Ahead of Key Data

The U.S. dollar weakened on Thursday as markets continued to price in expectations for Federal Reserve rate cuts in 2026, ahead of a key slate of economic data set to be released later this week. With the Fed’s dovish outlook increasingly priced into currency markets, the greenback struggled to maintain recent gains against major peers.

The dollar index dipped, losing ground to the euro and yen as investors anticipated a further slowdown in U.S. economic growth, particularly following weak labor market reports from the previous month. The data continues to support the view that the Fed may reduce rates sooner rather than later, with a growing expectation of cuts in the first quarter of 2026.

The EUR/USD pair saw strong buying interest, while the USD/JPY tested support levels, as the Japanese yen benefitted from safe-haven flows. Meanwhile, the British pound continued its recent rally, supported by better-than-expected growth data out of the U.K., which helped offset the global economic slowdown.

Equities held steady, with major indexes taking a breather after a strong start to the year. Investors are weighing whether the weaker dollar and the Fed’s anticipated policy stance will translate into stronger corporate earnings or if growing global risks will dampen momentum.

Gold also gained modestly, benefiting from the weaker dollar and investor concern over geopolitical risks. The metal remains a key hedge against potential inflationary pressures and further economic uncertainties as we enter 2026.

Overall, with key U.S. data—such as the nonfarm payrolls report and inflation numbers—set to hit markets in the coming days, traders are staying cautious, awaiting further confirmation of the Fed’s path forward in 2026.