Sterling remained lower after an unexpected steep drop in UK inflation supported the case for a rate cut by the Bank of England. The yen trimmed losses from the previous session on expectations the Bank of Japan will lift rates on Friday to a three-decade high.
The dollar took in its stride comments from US President Donald Trump that the next head of the US Federal Reserve would believe in lower interest rates “by a lot”.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was up 0.2% at 98.55 after advancing 0.2% in the previous session.
The yen dipped 0.1% to 155.85, extending a 0.6% slide on Wednesday.
The euro was down 0.2% at US$1.1718, while sterling was a touch softer at US$1.3348 after a 0.4% decline the previous day.
Interest rate futures have priced in a near 100% chance of a quarter-point rate cut from the BoE on Thursday following the UK’s surprisingly weak November inflation data. The European Central Bank is widely expected to hold rates steady and signal little appetite for cuts in the near term when it meets on Thursday.
“We don’t expect any new policy signals from the ECB and we have a hard time seeing that the ECB will hike rates in 2026, or even 2027,” said Danske Bank analyst Mohamad Al-Saraf.
“But it looks like a done deal we’ll see a cut from the BoE and we are likely going to see a weaker pound on the announcement.”
The Swedish and Norwegian central banks both kept their main interest rates on hold on Thursday, in line with expectations. The Swedish crown was little changed at 10.899 per euro, while Norway’s crown was a touch stronger at 11.955 per euro.
In Asia, the BOJ looks almost certain to raise short-term interest rates to 0.75% from 0.5% as high food costs keep inflation above the central bank’s 2% target.
The BOJ may raise rates twice in 2026 to contend with persistent, real negative interest rates, according to Vincent Chung, a Hong Kong-based fixed-income portfolio manager at T Rowe Price.
“There are some expectations that BOJ would not be hawkish in forward guidance and lead to some weakness in the yen, but we believe that this would be temporary,” Chung said.
In the US, uncertainty remains on when the Fed might cut rates again and whether the central bank can maintain its independence as Trump muses about possible successors to Fed Chair Jerome Powell whose term ends in May.
Fed Governor Christopher Waller said on Wednesday the US central bank still had room to cut interest rates amid rising job market weakness. That was in contrast to commentary by Atlanta Federal Reserve President Raphael Bostic, who said on Tuesday that he did not think that the Fed’s decision to cut rates last week was warranted.
Trump, who wants to be consulted on Fed decisions, said at a broadcast from the White House that he would soon announce his pick to replace Powell.
“I’ll soon announce our next chairman of the Federal Reserve, someone who believes in lower interest rates, by a lot, and mortgage payments will be coming down even further,” Trump said.
All of the known contenders — White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh and Waller — argue interest rates should be lower than they are now though none has indicated policy should be as low as suggested by Trump.