The Federal Reserve has the room to "hold rates steady," which benefits the strengthening of the dollar.
2026-02-13 18:22:24
A strong US jobs report in January allowed the Federal Reserve to pause its pace of further interest rate cuts. Meanwhile, market expectations for the yen are focused on the logic of capital repatriation, while the pound is facing the dual impact of "political risk + monetary easing."
The current expansion of the US economy is driven not only by the rapid development of the artificial intelligence industry and the wealth effect brought about by the stock market boom, but also in part by changes in population structure. With increasing life expectancy, the demand for medical and nursing services from the aging population has surged, leading to a hiring boom in the healthcare industry, which significantly supported the creation of 130,000 new jobs in the US in January. This structural employment growth further strengthens the resilience of the labor market.
Following the release of the employment data, the market's expectation of a Federal Reserve rate cut in April fell to 22%, and the probability of a rate cut in June also dropped to 58%. This delay in rate cut expectations directly boosted the US dollar, causing the euro to weaken against the dollar. This trend reflects the market's repricing of the US interest rate path.
The decline in the unemployment rate reinforces the "pause" logic.
The unemployment rate has fallen to 4.3%, the number of part-time workers has decreased, and the number of long-term unemployed (unemployed for more than six months) has also declined. These indicators collectively paint a picture of a stabilizing labor market. Currently, there are no signs of significant deterioration in the employment structure, and inflationary pressures from rising wages are within a manageable range.
For the Federal Reserve, which has already completed three rate cuts by 2025 to avoid excessive pressure on the economy, the current situation is undoubtedly ideal. Policymakers neither need to rush to implement further easing policies nor be forced to take emergency measures due to an economic slowdown. With inflation not yet fully back to the target level and economic growth still resilient, "waiting for more data to be released" becomes the most cost-effective policy option.
This policy suspension means that the dollar's interest rate advantage will continue for a longer period, thus exerting sustained downward pressure on the euro and other major currencies.
Meanwhile, Donald Trump has publicly called for lower borrowing costs to reduce the federal government's annual interest payments on trillions of dollars in debt. The White House has also consistently emphasized the fiscal burden, but as long as the Federal Reserve's independence is not substantially challenged, the market will likely continue to believe that monetary policy will be driven by economic data. Under this premise, the bearish trend in the euro/dollar (EURUSD) exchange rate will remain dominant.
Medium-term divergence between the euro, pound sterling and yen
A stronger dollar has created room for bulls in the USD/JPY pair to regroup and launch an offensive. Previously, one of the key drivers of the pair's climb to its January highs was the "carry trade"—where investors borrow low-interest-rate yen and then buy higher-yielding dollar assets.
However, BCA Research cautions that carry trade unwinding occurred in 2008, 2015, and 2020. When global risk appetite declines or funding currencies (such as the Japanese yen) strengthen, the USD/JPY pair often experiences a rapid pullback. This historical experience suggests that the current upward trend in USD/JPY is not insurmountable should market risk sentiment reverse.
On the other hand, the yen is supported by market confidence in the stabilization of Japan's financial system under Sanae Takaichi's administration. Expectations of policy stability may accelerate the return of Japanese capital and improve the structure of domestic capital flows. Meanwhile, Asian stock indices' best start to the year so far this century is also attracting overseas funds into the Japanese market.
However, the interest rate differential between the Federal Reserve and the Bank of Japan remains significant. As long as this differential remains high, the attractiveness of dollar-denominated assets will continue to limit the yen's upside potential. Therefore, the future movement of the USD/JPY exchange rate will depend more on the interplay between global risk appetite and interest rate dynamics.
Pound Sterling: A Prelude to a Double Shock
Strong US jobs data also put pressure on the pound. According to Citigroup analysis, the downward momentum of the pound against the dollar (GBPUSD) may accelerate in the second quarter, mainly due to the "double whammy" of rising political risks and a shift towards looser monetary policy.
Domestic political uncertainty in the UK could drive up risk premiums, and if the Bank of England initiates or accelerates its interest rate cut cycle, it will further narrow the interest rate advantage between the pound and the dollar. Against the backdrop of a persistently strong dollar, the pound's vulnerability will become more pronounced. If the market begins to pre-emptively price in expectations of a UK economic slowdown, the pound/dollar (GBPUSD) could become the weakest performing major currency pair.
Gold: Failed to break through, but did not weaken.
The positive effect of US employment data prevented gold prices from stabilizing above $5,100 per ounce. Theoretically, strong employment data suggests that interest rate cuts will be delayed, thereby pushing up real interest rates, which would put downward pressure on gold, a non-interest-bearing asset.
However, gold prices did not experience a deep correction, instead remaining at a relatively stable level. This phenomenon indicates that speculative demand and safe-haven demand continue to support the gold market. If future economic data shows signs of slowing down, or financial market volatility intensifies, gold is likely to regain upward momentum.
Overall judgment
In summary, the Federal Reserve currently has ample "wait-and-see" space. A robust job market and continued economic expansion mean it doesn't need to rush into action. The US dollar has thus benefited and strengthened, while the euro and pound sterling are showing divergent trends and facing pressure. The yen is caught in a tug-of-war between interest rate differential pressures and expectations of capital repatriation. Gold's short-term movement is limited, but structural demand remains.
The core variable in the current market has shifted from "when will the Federal Reserve cut interest rates" to "is it necessary to cut interest rates?" Until this logic undergoes a complete transformation, the relative advantage of dollar-denominated assets will likely be maintained.
The current expansion of the US economy is driven not only by the rapid development of the artificial intelligence industry and the wealth effect brought about by the stock market boom, but also in part by changes in population structure. With increasing life expectancy, the demand for medical and nursing services from the aging population has surged, leading to a hiring boom in the healthcare industry, which significantly supported the creation of 130,000 new jobs in the US in January. This structural employment growth further strengthens the resilience of the labor market.
Following the release of the employment data, the market's expectation of a Federal Reserve rate cut in April fell to 22%, and the probability of a rate cut in June also dropped to 58%. This delay in rate cut expectations directly boosted the US dollar, causing the euro to weaken against the dollar. This trend reflects the market's repricing of the US interest rate path.
The decline in the unemployment rate reinforces the "pause" logic.
The unemployment rate has fallen to 4.3%, the number of part-time workers has decreased, and the number of long-term unemployed (unemployed for more than six months) has also declined. These indicators collectively paint a picture of a stabilizing labor market. Currently, there are no signs of significant deterioration in the employment structure, and inflationary pressures from rising wages are within a manageable range.
For the Federal Reserve, which has already completed three rate cuts by 2025 to avoid excessive pressure on the economy, the current situation is undoubtedly ideal. Policymakers neither need to rush to implement further easing policies nor be forced to take emergency measures due to an economic slowdown. With inflation not yet fully back to the target level and economic growth still resilient, "waiting for more data to be released" becomes the most cost-effective policy option.
This policy suspension means that the dollar's interest rate advantage will continue for a longer period, thus exerting sustained downward pressure on the euro and other major currencies.
Meanwhile, Donald Trump has publicly called for lower borrowing costs to reduce the federal government's annual interest payments on trillions of dollars in debt. The White House has also consistently emphasized the fiscal burden, but as long as the Federal Reserve's independence is not substantially challenged, the market will likely continue to believe that monetary policy will be driven by economic data. Under this premise, the bearish trend in the euro/dollar (EURUSD) exchange rate will remain dominant.
Medium-term divergence between the euro, pound sterling and yen
A stronger dollar has created room for bulls in the USD/JPY pair to regroup and launch an offensive. Previously, one of the key drivers of the pair's climb to its January highs was the "carry trade"—where investors borrow low-interest-rate yen and then buy higher-yielding dollar assets.
However, BCA Research cautions that carry trade unwinding occurred in 2008, 2015, and 2020. When global risk appetite declines or funding currencies (such as the Japanese yen) strengthen, the USD/JPY pair often experiences a rapid pullback. This historical experience suggests that the current upward trend in USD/JPY is not insurmountable should market risk sentiment reverse.
On the other hand, the yen is supported by market confidence in the stabilization of Japan's financial system under Sanae Takaichi's administration. Expectations of policy stability may accelerate the return of Japanese capital and improve the structure of domestic capital flows. Meanwhile, Asian stock indices' best start to the year so far this century is also attracting overseas funds into the Japanese market.
However, the interest rate differential between the Federal Reserve and the Bank of Japan remains significant. As long as this differential remains high, the attractiveness of dollar-denominated assets will continue to limit the yen's upside potential. Therefore, the future movement of the USD/JPY exchange rate will depend more on the interplay between global risk appetite and interest rate dynamics.
Pound Sterling: A Prelude to a Double Shock
Strong US jobs data also put pressure on the pound. According to Citigroup analysis, the downward momentum of the pound against the dollar (GBPUSD) may accelerate in the second quarter, mainly due to the "double whammy" of rising political risks and a shift towards looser monetary policy.
Domestic political uncertainty in the UK could drive up risk premiums, and if the Bank of England initiates or accelerates its interest rate cut cycle, it will further narrow the interest rate advantage between the pound and the dollar. Against the backdrop of a persistently strong dollar, the pound's vulnerability will become more pronounced. If the market begins to pre-emptively price in expectations of a UK economic slowdown, the pound/dollar (GBPUSD) could become the weakest performing major currency pair.
Gold: Failed to break through, but did not weaken.
The positive effect of US employment data prevented gold prices from stabilizing above $5,100 per ounce. Theoretically, strong employment data suggests that interest rate cuts will be delayed, thereby pushing up real interest rates, which would put downward pressure on gold, a non-interest-bearing asset.
However, gold prices did not experience a deep correction, instead remaining at a relatively stable level. This phenomenon indicates that speculative demand and safe-haven demand continue to support the gold market. If future economic data shows signs of slowing down, or financial market volatility intensifies, gold is likely to regain upward momentum.
Overall judgment
In summary, the Federal Reserve currently has ample "wait-and-see" space. A robust job market and continued economic expansion mean it doesn't need to rush into action. The US dollar has thus benefited and strengthened, while the euro and pound sterling are showing divergent trends and facing pressure. The yen is caught in a tug-of-war between interest rate differential pressures and expectations of capital repatriation. Gold's short-term movement is limited, but structural demand remains.
The core variable in the current market has shifted from "when will the Federal Reserve cut interest rates" to "is it necessary to cut interest rates?" Until this logic undergoes a complete transformation, the relative advantage of dollar-denominated assets will likely be maintained.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
