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It has been a noisy couple of weeks in FX markets, with three key themes in play: 1) Optimism over global growth driving strong gains in commodities and EMFX, 2) Ongoing fears over a captured Fed and the dollar debasement trade, and 3) Weak fiscal positions being exposed by developments in Japanese politics and JGBs. None of these look dollar positive.
 

USD: Price action has been soft

It has been a noisy couple of weeks in FX markets as Washington-sourced geopolitical noise has washed through global financial markets. There is much discussion over President Trump's TACO on Greenland this week, and increasingly investors are learning to live with these maximalist opening demands as Trump seeks to expand his reach. After spiking to 6.2% earlier this week, one-month traded EUR/USD volatility is now back at 5.4% – levels seen before Venezuela and Greenland hit the headlines.

Looking at price action in global FX markets right now, we would say there are three dominant themes. The first is a risk-on view of the global economy in 2026 as modest, synchronised global growth (in an environment of contained inflation and perhaps a couple of Fed rate cuts), which is triggering decent interest in commodity and emerging currencies. Buy-side surveys show investors surprisingly upbeat on global growth prospects this year and now running record low cash levels as money is being put to work. This theme has helped the Australian dollar to top the G10 leaderboard this year, while in the EM space it is the metals-driven Latam currencies leading the charge.

The second theme remains the dollar debasement trade, where fears over a captured Fed are adding to gains in the precious metals complex. This theme is powering the gold and silver rally. Here, the National Bank of Poland has this month approved a plan to add another 150 tonnes to its gold holdings as it moves away from fiat currencies in its reserves. The gold rally is driving currencies like the South African rand higher and this theme is also helping the Swiss franc, in our opinion.

And the third theme we have seen this week is those currencies with weak fiscal positions and exposed by the sell-off in JGBs. As Francesco Pesole highlighted recently, this theme hits the dollar, the pound and the yen.

The dollar looks on the wrong side of the ledger for all three themes above. The challenge will be whether they continue to dominate – probably yes – or whether some better US consumption/activity data can delay Fed cuts still further and give the dollar a short-term boost against the G10 low-yielders. Our preference is that the dollar decline happens from 2Q onwards, but we need to be nimble.

For today, we have some S&P PMIs for the US and some final January consumer confidence data. We favour DXY holding support at 98.20/25, but a break could challenge the December lows at 97.75.
 

EUR: Looking for a repeat of early 2025

Events this week have seen most conclude that Europe needs to be the master of its own destiny. This time last year, US Defence Secretary Pete Hegseth was rubbishing NATO and driving Europe into more defence spending and more German fiscal stimulus. Eurozone 10 year swap rates jumped 40bp on this theme last year and quickly dragged EUR/USD some 5% higher. It is hard to see similar-size moves happening again – unless there is some surprise extra fiscal stimulus emerging – but this is a theme that will provide support to the euro on dips.

For today, let's see whether eurozone PMIs can tick a little higher as expected. Remember, the eurozone manufacturing PMI is still in contractionary territory sub 50. Any above 50 readings here in early Europe today could give EUR/USD another boost. 1.1770/1780 is intra-day resistance. Any unexpected break of resistance at 1.1810 would prompt us to reassess our neutral EUR/USD view this quarter.
 

JPY: BoJ slightly hawkish, but politics weigh

On another day, today's Bank of Japan meeting might have sent USD/JPY a little lower. Growth and inflation forecasts were revised up and the BoJ seemed to be showing concerns about potential labour shortages and what it could mean for wages. However, the political/fiscal story is dominating in Japan. Were PM Sanae Takaichi to prove successful in securing an LDP majority in elections on 8 February, JGB yields would rise again and the yen would be hit on fiscal concerns.

We've got a slightly bullish USD/JPY bias into that election event risk – especially should US activity data continue to perform well.
 

CEE: Good global news outweighs dovish pricing in the region

Polish data surprised to the upside yesterday. Industrial production grew significantly stronger than expected by 7.3% YoY while wage growth jumped to 8.6%. This essentially takes the National Bank of Poland rate cut in February off the table in our opinion, but March is still our baseline. Wage growth in particular can be a tricky topic for the central bank, and it can be assumed that the NBP will wait for the January figures to see if this was a one-off jump or a new trend.

Today should be muted based on the regional calendar, but the global story and risk-on mood have once again put CEE in motion and we have seen a strong rally in the FX market. The combination of risk-on sentiment after US trade headlines and renewed hopes for a peace deal between Ukraine and Russia has supported the entire region to unexpected gains.

The main focus should be on EUR/HUF, which is, surprisingly for us, testing new lows in the context of central banks approaching rate cuts. On the other hand, a stronger CEE FX should support central banks across the region to go for rate cuts. For now, there is nothing else to do but go with the flow of good news, but we still hold the view that rate cut pricing will push CZK and HUF, in particular, to weaker levels. Therefore, the current rally could be a good entry point before the Czech National Bank and National Bank of Hungary rate cuts in the coming months.

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