Market reactions to economic data

The U.S. dollar strengthened across the board following the release of robust ISM Services PMI data and lower-than-expected jobless claims. The EUR/USD pair extended its decline, falling below the 1.0800 handle as hawkish expectations surrounding the Federal Reserve contrasted with ongoing concerns about sluggish growth in the Eurozone. The euro struggled to gain traction despite ECB officials reiterating their cautious stance on rate cuts.

The USD/JPY pair pushed higher, briefly touching 150.80 as rising U.S. Treasury yields supported further dollar gains. However, traders remained cautious about potential intervention from Japanese authorities, as previous warnings from the Bank of Japan and the Ministry of Finance suggested that sharp yen depreciation might prompt official action.

Central bank signals and economic data releases fueled significant moves in the forex market, with traders recalibrating expectations for monetary policy paths across major economies.

Meanwhile, in Canada, Bank of Canada (BoC) Governor Tiff Macklem acknowledged the recent soft GDP data and noted that the economy has shown signs of slowing. While he refrained from explicitly signalling an imminent rate cut, Macklem suggested that the central bank remains open to policy adjustments if economic conditions warrant easing. This dovish tone weighed on the Canadian dollar, as traders priced in a higher probability of a rate reduction in the coming months.

The North American session saw notable market movements as traders reacted to the latest economic data releases from the U.S. and Canada.

Major currency pair movements

For the British pound, the UK’s Construction PMI came in softer than expected at 48.9, signaling contraction in the sector and adding to concerns over the broader economic outlook. This contributed to GBP/USD slipping below 1.2600 as traders questioned the Bank of England’s ability to maintain a hawkish stance.

The session was dominated by strong U.S. economic data, which continued to support the greenback while weighing on risk-sensitive currencies.

The EUR/USD pair slid lower as traders reacted to a stronger U.S. ISM Services PMI, which came in at 54.3, exceeding expectations of 52.8. This reinforced expectations that the Federal Reserve might keep interest rates higher for longer, putting pressure on the euro. Meanwhile, GBP/USD also retreated, dropping below the 1.2600 mark as traders digested softer-than-expected UK construction PMI data.

Commodity-linked currencies faced headwinds, with the AUD/USD pair retreating below the 0.6550 level amid risk-off sentiment and stronger U.S. data. Softer commodity prices, particularly in iron ore, also weighed on the Aussie, adding to its downside pressure. Similarly, the USD/CAD pair climbed above 1.3600 as the weaker-than-expected Canadian GDP print fuelled speculation that the Bank of Canada might move toward policy easing sooner than the Fed.

In Asia-Pacific developments, the Reserve Bank of Australia’s latest policy meeting minutes indicated a cautious approach, citing ongoing uncertainty in global markets. However, the Australian dollar remained under pressure as weak commodity prices and slowing Chinese demand weighed on sentiment, keeping AUD/USD near 0.6520.

Central bank statements and policy shifts

Across the Atlantic, European Central Bank (ECB) policymakers maintained a cautious stance, with ECB President Christine Lagarde stating that the central bank remains data-dependent and is not in a rush to cut rates. However, some ECB officials hinted at the possibility of a rate reduction by mid-year if inflation continues to ease. This uncertainty contributed to the euro’s lacklustre performance during the session.

In the U.S., Federal Reserve officials reiterated their cautious approach to monetary policy, emphasising that rate cuts would only be considered once there was greater confidence that inflation was sustainably moving towards the 2% target. Fed Governor Michelle Bowman stated that while inflation has moderated, pressures remain in certain sectors, justifying a patient stance. This reinforced market expectations that the Fed may delay rate cuts until the second half of the year, leading to continued support for the U.S. dollar.

The North American session saw significant volatility across major currency pairs, driven by key economic data and shifting risk sentiment. The U.S. dollar remained firm, supported by solid economic releases, while commodity-linked currencies struggled amid weaker global demand concerns.

Meanwhile, Canadian GDP data for the fourth quarter of 2024 showed a 0.3% quarterly increase, slightly below the anticipated 0.4% growth. While the economy avoided contraction, the softer figure led to increased speculation that the Bank of Canada might consider easing monetary policy sooner than previously expected. The Canadian dollar weakened after the release, particularly against the U.S. dollar and the euro.

Safe-haven demand remained mixed, with USD/JPY inching higher towards 150.80 as U.S. Treasury yields ticked up, reinforcing the Bank of Japan’s dilemma in managing its ultra-loose monetary policy. The Swiss franc, however, saw modest gains, with USD/CHF hovering near 0.8760 as geopolitical tensions in Eastern Europe kept risk sentiment in check.

The U.S. economic calendar featured the ISM Services PMI, which surprised to the upside at 54.3, exceeding forecasts of 52.8. This robust data reinforced expectations that the Federal Reserve may maintain its current policy stance for longer, reducing the likelihood of imminent rate cuts. Following the release, U.S. Treasury yields climbed, further supporting the dollar.

Market participants paid close attention to statements from major central banks, which provided further insights into potential policy shifts in the coming months.

In Japan, Bank of Japan (BoJ) officials continued to signal a potential shift in monetary policy, with speculation growing that the central bank may exit its negative interest rate policy later in the year. BoJ Deputy Governor Shinichi Uchida highlighted that the bank remains vigilant about wage growth and inflation trends, suggesting that a policy adjustment could be on the horizon. Despite this, the Japanese yen remained under pressure due to the strength of the U.S. dollar and rising Treasury yields.

Across the Atlantic, the European Central Bank’s latest comments added pressure to the euro. ECB policymakers reiterated concerns over sluggish growth in the eurozone, with some officials hinting at the possibility of policy easing later in the year. This dovish rhetoric, combined with the strong U.S. data, dragged EUR/USD lower towards 1.0810.

With markets adjusting to these data points, traders closely watched central bank rhetoric for further confirmation on the potential policy trajectory for the coming months.

The latest central bank developments and economic data releases played a crucial role in shaping market sentiment during the North American session. Traders closely monitored fresh indicators that could influence monetary policy decisions in the coming weeks.

Central bank updates and economic data releases

Additionally, U.S. jobless claims came in at 210,000, slightly lower than the expected 213,000. The lower-than-expected claims signalled resilience in the labour market, supporting the Federal Reserve’s cautious approach to monetary easing. Equity markets also responded positively, while U.S. Treasury yields edged higher.

The North American session saw the U.S. dollar maintaining its dominance, with traders closely monitoring upcoming central bank communications and additional economic data for further direction.

Central bank rhetoric played a crucial role in shaping market sentiment, with traders adjusting their expectations based on the latest policy signals from major monetary authorities.

Commodity currencies took a hit, with AUD/USD dipping towards 0.6520 after a pullback in iron ore prices and renewed concerns over slowing demand from China. Similarly, USD/CAD climbed above 1.3570 as oil prices slipped, weighing on the Canadian dollar.

Meanwhile, in Canada, the latest GDP report revealed a slight 0.1% contraction for January, missing market expectations of a flat reading. This weaker-than-expected growth data weighed on the Canadian dollar, pushing USD/CAD above 1.3570 as traders speculated on a more dovish stance from the Bank of Canada in future meetings.

Meanwhile, the GBP/USD pair slipped toward 1.2650, pressured by broad-based dollar strength. Market participants remained wary of the Bank of England’s next policy moves, with recent UK economic data painting a mixed picture of the economy. The higher U.S. bond yields further weighed on the pound, with traders favouring the greenback in light of resilient U.S. economic indicators.

In the U.S., the ISM Services PMI for February came in stronger than expected at 54.8, surpassing the forecast of 53.5. This indicated continued expansion in the services sector, reinforcing expectations that the Federal Reserve may maintain a cautious stance on rate cuts. As a result, the U.S. dollar gained ground against most of its major counterparts, with traders pricing in a potentially longer period of restrictive monetary policy.