The U.S. Client Worth Index for December got here in with a softer-than-expected core studying, briefly sparking dovish Fed expectations earlier than geopolitical tensions and tariff issues reasserted greenback energy via safe-haven flows.
Which USD methods moved past the watchlist stage, and the way did shifting total market sentiment affect the outcomes?
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We’re breaking down our greenback setups this week and analyzing how every pair carried out after the combined CPI launch whereas markets navigated Fed independence issues, Japan’s snap election hypothesis, and escalating U.S.-Iran tensions.
The Setup
What We Had been Watching: U.S. CPI (December 2025)
Expectation: Headline CPI: +0.2% m/m anticipated, +2.6% y/y anticipated, Core CPI: +0.2% m/m anticipated, +2.6% y/y anticipated
Knowledge consequence: Headline CPI: +0.3% m/m (matched expectations), +2.7% y/y (matched expectations), Core CPI: +0.2% m/m (beneath 0.3% consensus), +2.6% y/y (beneath 2.7% expectations)
Market setting surrounding the occasion: Barely detrimental threat sentiment dominated by political stress on Fed Chair Powell following DOJ subpoena disclosures, Japanese snap election hypothesis triggering sustained yen weak spot, President Trump’s 25% tariff threats on Iran’s buying and selling companions, and de-escalating then re-escalating U.S.-Iran army tensions.
Occasion End result
Headline CPI slowed from 3.8% year-on-year in October to only 3.4% in November, as each items and companies inflation moderated. Trimmed imply inflation additionally eased, though housing prices continued to exert sturdy upward stress.
Key Takeaways:
Headline inflation held regular at 2.7% year-over-year, matching November’s fee and assembly economist expectations, with month-to-month costs rising 0.3%
Core inflation got here in at 2.6% yearly, barely beneath the two.7% forecast and marking the bottom degree since early 2021, with month-to-month core costs rising simply 0.2% versus 0.3% consensus
Meals costs jumped 3.1% yearly and 0.7% month-to-month—the very best month-to-month acquire since 2022, with floor beef up 15.5% and low surging 19.8% year-over-year
Shelter prices rose 3.2% year-over-year, accounting for the biggest single issue within the month-to-month improve, with lease and house owner prices each climbing 0.4% in December
Power costs moderated to +2.3% yearly from 4.2% the earlier month, with gasoline costs falling 3.4% year-over-year and dropping 0.5% for the month
Egg costs plummeted 20.9% from a 12 months in the past as avian flu provide disruptions eased
USD initially weakened on the softer core studying as merchants elevated expectations for Fed fee cuts in 2026. Nonetheless, the greenback reversed course inside an hour and strengthened via the afternoon session, in the end closing larger in opposition to all main currencies.
The turnaround appeared pushed by President Trump’s Monday night announcement of 25% tariffs on nations conducting enterprise with Iran, which sparked contemporary geopolitical uncertainty and triggered safe-haven flows into the greenback regardless of the inflation information’s dovish implications.
Basic Bias Triggered: Bearish USD setups
Broad Market and Exogenous Drivers:
Fed Independence Disaster (Monday): Markets opened the week digesting Fed Chair Jerome Powell’s uncommon weekend disclosure that the Justice Division had issued grand jury subpoenas tied to his congressional testimony. The political stress rattled confidence in Fed independence, triggering early greenback weak spot. Gold jumped on protected haven demand earlier than paring beneficial properties, whereas the greenback stayed on the again foot via the in a single day session.
Japan Snap Election Hypothesis (Monday to Wednesday): The yen ended up because the weakest main foreign money of the week regardless of softer greenback circumstances. Discuss that Prime Minister Takaichi might name a snap election in early February fueled expectations for heavier fiscal spending and looser coverage, overpowering repeated intervention warnings from Tokyo. USD/JPY pushed above 159.00, whereas EUR/JPY, GBP/JPY, and CHF/JPY all printed contemporary multi-year or file highs.
Iran Tariff Escalation (Tuesday to Wednesday): President Trump’s announcement of 25% tariffs on nations doing enterprise with Iran lifted the greenback and despatched WTI crude as much as $60.80 on provide threat fears. That transfer reversed rapidly after Trump softened his tone on Tuesday afternoon, knocking oil decrease and draining the geopolitical threat premium.
Geopolitical De-escalation (Wednesday to Thursday): Midweek introduced a pointy reversal as U.S.-Iran tensions eased and stronger intervention rhetoric from Japanese officers sparked yen shopping for. Threat urge for food improved Thursday after Trump mentioned the killing had stopped, although hawkish Fed indicators and BOJ fee hike chatter saved foreign money strikes contained.
Combined U.S. Knowledge & Fed Chair Hypothesis (Wednesday-Friday): U.S. information via midweek leaned agency, with retail gross sales beating expectations and inflation and labor indicators coming in hotter than forecast, reinforcing a resilient development narrative. The greenback briefly slipped Friday after contemporary tariff threats however rapidly rebounded when Trump signaled he would maintain Kevin Hassett on the Nationwide Financial Council, boosting hypothesis that Kevin Warsh might emerge as the following Fed Chair.
USD/JPY: Bearish USD Occasion End result + Threat-Off State of affairs = Arguably good odds of a internet constructive consequence
USD/JPY 1-hour Foreign exchange Chart by TradingView
Our bearish USD/JPY watchlist anticipated {that a} cooler CPI might push markets towards a extra aggressive Fed fee reduce path, and if broad sentiment was internet detrimental, drive protected haven flows into the yen, and pull the pair towards the 157.20–157.60 Fibonacci zone and even 156.50–157.00 assist.
Core CPI got here in softer than anticipated at 0.2% m/m versus 0.3% anticipated, validating the bearish USD thesis. The preliminary greenback dip was transient, although, as geopolitical headlines took over. Japan snap election hypothesis triggered aggressive yen promoting, sending USD/JPY to 159.45, properly above our most popular ranges, as markets priced in delayed BOJ normalization underneath a possible Takaichi victory.
The reversal got here on Wednesday afternoon. Rising U.S.–Iran tensions and stronger jawboning from Tokyo officers, together with Finance Minister Katayama calling yen weak spot unjustified and flagging intervention threat, sparked sharp yen shopping for. USD/JPY regarded prefer it was headed to our 157.20–157.60 set off zone.
We stayed affected person forward of PPI. The info largely matched expectations, with a flat core studying reinforcing the view that CPI was not a one-off dovish miss. With our technical bias enjoying out and fundamentals aligned, the setup moved past the watchlist stage.
Observe via, nevertheless, will not be as easy. Competing narratives round Fed independence, geopolitical swings, and BOJ intervention threats saved worth motion uneven, highlighting how execution and threat administration matter even when a setup checks each field. USD/JPY capped the week simply above 158.00 regardless of speculations of a dovish substitute for Fed Chair Powell and Trump’s contemporary tariff threats on European items.
Not Eligible to Transfer Past Watchlist – AUD/USD & Bullish USD Setups
AUD/USD: Bearish USD Occasion End result + Threat-On State of affairs
AUD/USD 1-hour Foreign exchange Chart by TradingView
Our bearish AUD/USD watchlist setup flagged the pair buying and selling close to .6700, with resistance round .6725 and better inflection factors within the .6770 to .6800 space. The thought was {that a} softer CPI print, mixed with a risk-off backdrop, might ultimately weigh on the Aussie amid China development worries, softer gold, and defensive USD positioning.
Core CPI did are available softer, briefly pressuring the greenback and lifting AUD/USD towards .6725. That transfer ran in opposition to the setup, because the CPI shock triggered risk-on flows as an alternative of the risk-off setting we have been in search of.
The remainder of the week noticed AUD/USD maintain in a 20 – 40 pip vary. Stronger Chinese language information, easing geopolitical tensions, and upbeat international information saved threat urge for food agency. From a technical standpoint, AUD/USD held above .6670 and by no means delivered a bearish breakdown, leaving the setup on the watchlist and untriggered.
USD/JPY: Bullish USD Occasion End result + Threat-On State of affairs
USD/JPY 1-hour Foreign exchange Chart by TradingView
Our bullish USD/JPY setup eyed a attainable bounce off the retracement ranges ought to the U.S. CPI report briefly take the pair all the way down to the pullback space, projecting that the uptrend might resume within the succeeding buying and selling classes whereas markets place for a extra hawkish Fed.
Nonetheless, the precise outcomes revealed softer core inflationary pressures, invalidating the concept because the pair failed to carry above the 38.2% Fib and 158.00 assist degree and as an alternative edged decrease all through the week.
Though Japanese snap elections jitters put the yen on the again foot midweek and sure spurred a USD/JPY rally to 158.85, profit-taking quickly erased its beneficial properties whereas merchants turned their consideration to Fed political pressures, tariffs drama, and yen jawboning. Finally, worth resumed its bearish trajectory to dip near the 50% Fib at 157.76 by week’s finish.
USD/CAD: Bullish USD Occasion End result + Threat-Off State of affairs
USD/CAD 1-hour Foreign exchange Chart by TradingView
Our bullish USD/CAD setup eyed a short-term rising pattern line that might maintain as assist within the occasion the U.S. CPI comes in step with expectations or larger. The precise outcomes mirrored weaker core inflation, rendering this concept not viable to maneuver past the watchlist stage.
As well as, the oil-related Loonie probably acquired some basic assist from Iran geopolitical tensions midweek on Trump’s tariffs threats, reviving provide fears for the vitality commodity. These pulled USD/CAD to the goal entry space across the 38.2% Fib, which did maintain as assist when safe-haven flows moved in favor of the greenback in the course of the again half of the week to check its intraweek excessive.
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The Verdict
The U.S. December CPI launch delivered a softer-than-expected core studying (0.2% month-to-month versus 0.3% consensus), validating a bearish USD basic bias and triggering preliminary greenback weak spot as merchants repriced for extra aggressive Fed fee cuts in 2026.
Nonetheless, this dovish inflation shock proved nearly irrelevant to the week’s dominant worth motion, as geopolitical developments, Japan’s political disaster, and commodity market volatility utterly overwhelmed the scheduled information narrative.
The softer core CPI studying validated our bearish USD basic bias however failed to provide sustained greenback weak spot as a result of counter-currency elements, significantly Japan’s snap election hypothesis and the ensuing historic yen weak spot, created such highly effective cross-currents that conventional CPI reactions couldn’t take maintain.
USD/JPY emerged because the week’s focus pair and the one setup to arguably transfer past the watchlist stage, although via a path extra complicated than our preliminary framework anticipated. The pair initially rallied to 159.45 regardless of the softer core CPI as Japan’s election uncertainty dominated, earlier than Wednesday afternoon’s intervention warnings from Tokyo officers and escalating U.S.-Iran tensions drove sharp yen shopping for.
The bearish AUD/USD setup didn’t materialize as a result of the softer CPI triggered risk-on reasonably than risk-off flows, with better-than-expected Chinese language information and de-escalating geopolitical tensions supporting the Aussie all through many of the week.
Apparently, the bullish USD setups that have been invalidated by the CPI miss offered extra helpful strategic insights than our technically-correct bearish bias. USD/JPY’s resilience above technical assist regardless of dovish U.S. inflation demonstrated that counter-currency political crises can utterly dominate scheduled financial information.
USD/CAD’s capability to carry its ascending pattern line and attain 1.3918 regardless of the softer CPI confirmed that oil market volatility and Canadian information disappointments can validate technical constructions even when the first U.S. catalyst doesn’t cooperate.
General, we fee the watchlist dialogue as “neutral-to-unlikely” supportive of a possible constructive consequence. Whereas we accurately recognized the softer core CPI consequence and its dovish implications for Fed coverage, the anticipated market response by no means absolutely materialized as a result of we underestimated how utterly counter-currency elements would dominate the week’s narrative. The bearish USD/JPY setup by no means reached set off ranges, and the bearish AUD/USD setup was invalidated by risk-on flows responding to the identical information that ought to have supported our thesis.
The week delivered a essential lesson concerning the hierarchy of market drivers: when counter-currency political crises (Japan election), geopolitical commodity shocks (Iran-related oil volatility), or main cross-regional information surprises (Chinese language commerce, UK GDP) emerge throughout a scheduled occasion week, they’ll render even correct information forecasts strategically irrelevant.
Merchants who anchored completely to the CPI consequence missed that Japan’s snap election hypothesis, Trump’s shifting Iran rhetoric, and Wednesday-Thursday’s follow-up U.S. information (sturdy retail gross sales, shock manufacturing surveys) would show way more influential in figuring out greenback pair route than Tuesday’s inflation print.
Key Takeaways:
Geopolitical and Political Developments Can Overwhelm Financial Knowledge
December’s softer core CPI ought to have fueled dovish Fed repricing and greenback weak spot, however political and geopolitical headlines took over. Japan’s snap election chatter, Powell’s DOJ drama, and Trump’s Iran rhetoric dominated consideration, pushing inflation information into the background.
Forex-Particular Elements Create Uneven Alternatives
USD/JPY staying bid and reaching 159.45 regardless of softer CPI and intervention warnings confirmed how Japan’s political turmoil overwhelmed every little thing else. Yen weak spot pushed by election uncertainty and delayed BOJ normalization mattered way over a 0.1% CPI miss.
Countercurrency Headlines Can Outweigh U.S. Occasion Outcomes
Whereas CPI was the scheduled catalyst, Japan-focused headlines in the end dictated USD/JPY route all week. Broad yen weak spot throughout crosses highlighted how counter foreign money developments can overpower U.S. information completely.
Knowledge Heavy Weeks Require A number of State of affairs Planning
Markets initially reacted to softer CPI, however stronger retail gross sales and manufacturing information later within the week shifted the narrative again towards financial resilience. In busy information weeks, worth motion displays the complete information combine, not simply the primary launch.
Secure Haven Dynamics Are Not Uniform Throughout Currencies
Geopolitical threat supported the greenback however didn’t elevate the yen as a consequence of Japan’s home instability. Secure haven flows rely on native coverage credibility and political readability, not simply international threat sentiment.
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