U.S. Dollar Rises Ahead of Key Data; Pound Drops on Weak UK Jobs Report

The U.S. dollar moved higher on Tuesday as traders returned from the long weekend and prepared for a wave of important economic releases. At the same time, the British pound and the Canadian dollar came under pressure following fresh economic data.

At 13:18 ET (18:18 GMT), the Dollar Index — which measures the greenback against six major currencies — climbed 0.3% to 97.24, building on a 0.2% gain in the previous session.

Large parts of Asia, including China, remained closed for a holiday. U.S. markets reopened after observing George Washington’s birthday, leading to relatively calm but supportive trading conditions for the dollar.

Dollar Edges Higher Before Key U.S. Economic Data

Analysts at ING described the start of the week as quiet due to the U.S. holiday but noted that the dollar found underlying support. They highlighted short-term undervaluation as a factor that could justify gains during low-volatility sessions.

Market attention is now firmly focused on upcoming U.S. economic indicators. Investors are awaiting the minutes from the Federal Reserve’s January meeting, scheduled for release on Wednesday.

The Fed previously left interest rates unchanged while warning that inflation and labor market risks remain elevated. Since that decision, mixed payroll and inflation data have complicated the outlook for the U.S. economy.

Today’s ADP payrolls report is expected to draw interest after recent figures showed softness in late January. Meanwhile, the Empire Manufacturing Index is projected to ease slightly.

However, the key event of the week will be Friday’s release of the Personal Consumption Expenditures (PCE) price index. As the Federal Reserve’s preferred inflation measure, this data point could heavily influence expectations for future interest rate policy.

Sterling Slides as UK Unemployment Hits 5-Year High

In Europe, GBP/USD fell 0.7% to 1.3545 after fresh labor market data revealed further weakness in the UK economy.

According to the Office for National Statistics, the unemployment rate rose to 5.2% in the three months to December, up from 5.1% previously. This marks the highest level since early 2021.

Deutsche Bank economist Sanjay Raja noted that the single-month jobless rate already stands at 5.4%, suggesting there may still be room for further deterioration before reaching a cyclical peak.

At the same time, wage growth excluding bonuses slowed sharply to 4.2% annually, down from 4.5% in the prior period.

The weaker labor data strengthens expectations that the Bank of England could deliver additional rate cuts this year. Market forecasts currently anticipate two more reductions, possibly before summer.

With wage growth moderating and inflation projected to move closer to target levels by spring, policymakers may shift focus toward supporting the labor market.

Euro, Canadian Dollar and Inflation Trends

EUR/USD slipped 0.1% to 1.1842 ahead of Germany’s ZEW economic sentiment index, which is expected to show improving confidence in Europe’s largest economy.

In Canada, USD/CAD rose 0.1% to 1.3646. Government data showed inflation slowed slightly in January, with the consumer price index rising 2.3% year-over-year compared to 2.4% in December.

Macquarie economist David Doyle stated that softer inflation had been anticipated. Recent strength in the Canadian dollar could help reduce imported price pressures. However, improving economic conditions later in the year may gradually push underlying inflation higher.

Macquarie expects the Bank of Canada to maintain a prolonged pause in its rate cycle, with the next potential move being a rate hike in late 2026.

Yen Stabilizes After Weak Japan Growth Data

In Asia, USD/JPY remained steady near 153.37. The Japanese yen recovered modestly after sharp losses in the previous session.

Japan’s fourth-quarter GDP data came in significantly weaker than expected, raising concerns about slowing growth and increasing speculation of further stimulus measures from Tokyo.

At the same time, reports suggested the Bank of Japan may consider raising interest rates as early as April, providing some support to the yen.

Elsewhere, USD/CNY remained near three-year lows, while the Australian dollar edged slightly higher. Minutes from the Reserve Bank of Australia’s February meeting showed policymakers remain cautious following a recent rate hike, particularly as inflation pressures remain persistent.