Forex Today: Dollar struggles amid upbeat mood, ahead of high-impact US data

Here is what you need to know on Thursday, January 16:

Risk flows remain in vogue in the early European session on Thursday, with the US Dollar (USD) struggling alongside the US Treasury bond yields. The market optimism is linked to the revival of expectations that the US Federal Reserve (Fed) would remain on track for two interest rate cuts this year in light of tame inflation figures.

US Consumer Price Index (CPI) rose in line with estimates at an annual rate of 2.9% in December from November's 2.7%. However, core CPI, which excludes food and energy prices, rose by 3.2%, below forecasts of 3.3%. Earlier in the week, the US annual Producer Price Index (PPI) rose 3.3% in December, missing the expected 3.4% growth.

The dovish Fed bets, hopes for more Chinese stimulus and easing fears over potential disruptive trade tariffs under Donald Trump’s presidency lift investors’ sentiment while diminishing the USD’s safe-haven appeal.

However, FX majors fail to capitalize on the risk-on sentiment and a subdued USD, the Australian Dollar (AUD) and the Japanese Yen (JPY) emerging as the weakest currencies across the FX board. AUD/USD is closing in on the 0.6200 level after spiking to 0.6250 in a knee-jerk reaction to strong Australian employment change data. However, the uptick in the OZ Unemployment Rate added to the bets of early easing by the Reserve Bank of Australia (RBA).

Meanwhile, USD/JPY witnessed another volatile Asian session on Thursday, initially falling hard from 156.00 to 155.20 on mounting expectations that the Bank of Japan (BoJ) will hike interest rates next week. Citing unnamed sources, Bloomberg reported that the Japanese central bank is expected to raise rates next week, barring a major market rout following US President-elect Donald Trump’s inauguration. USD/JPY buyers returned with a bang and recaptured 156.00 following BoJ Governor Kazuo Ueda’s commentary.

The Pound Sterling maintains its offered tone, leaving GBP/USD gyrating near 1.2200 as traders digest the disappointing UK Gross Domestic Product (GDP) and Industrial Production data for November. The UK economy expanded at a monthly pace of 0.1% in November, below the forecast of +0.2%. Other data from the UK showed that monthly Industrial and Manufacturing Production dropped by 0.4% and 0.3%, respectively, in November. Both readings surprised markets to the downside.

EUR/USD defends minor bids near 1.0300 after failing to resist above the latter, courtesy of the improved market mood. But the further upside appears limited amid dovish European Central Bank (ECB) expectations and ahead of the ECB Policy Accounts of the December meeting. The pair also trades with caution before the release of the US Retail Sales and Jobless Claims data.

USD/CAD stays supported above 1.4350 as Oil price consolidates its rally to six-month highs. WTI oil price is down 0.45% on the day, trading below $79 as of writing.

Gold price rebounds to test $2,700 in the European session, reversing a brief dip to $2,690.

(This story was corrected on January 16 at 08:10 GMT to say that "Risk flows remain in vogue in the early European session on Thursday," not risk-off flows.)