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After trending lower from late November through late December, the US dollar has begun the new year on firmer footing. The retracement of the losses in late 2025 has been encouraged by data that strengthens the market's conviction that like last year, the Federal Reserve will begin this year with an extended pause that may carry well into Q2. While geopolitics is on everyone lips, the impact of the US action in Venezuela and threats to Greenland appear to have little direct market impact, though February WTI rose by around 3.7% last week, the most since October, to extend its advance for the third consecutive week. That matches longest streak since June-July 2024. Meanwhile, the US Supreme Court did not hand down its verdict on the president's use of emergency powers to broadly levy tariffs as had looked likely. And if there is no agreement in Congress on funding, the federal government will be shut again at the end of the month. 

The week ahead features US CPI, PPI, industrial production, and retail sales. Price pressures likely remained firm and economic activity may have improved sequentially. The surge in German November factory orders and industrial production failed to stem the euro's pullback, and there is little reason to expect the eurozone's aggregate trade and industrial production figures have much impact. Disappointingly weak Japanese labor earnings were not blunted by the stronger than expected household spending figures. The UK's monthly GDP print for November may show the first increase since last June, but the pub protests against Labour (and the government backed down) illustrates the political pressure exacerbated by the poor economic performance. China reports December trade surplus. There seems to be strong seasonal factors that favor a widening of the surplus in December, which has been the case for the past eight Decembers. 

U.S.

Drivers: From November 21 through Christmas Eve, the Dollar Index fell by 2.65%. Corrective forces are unfolding, and this allows further greenback gains. The data reinforces the sense that the Federal Reserve will begin this year like it began last year: pausing after delivering three cuts in rapid succession. There is around 35% correlation between changes in the Dollar Index and changes in the US two- and 10-year yields over the past 30 sessions, which is slightly lower than over the past 60 sessions. 

Data: Following last week's jobs data, the US reports December CPI and November PPI. While the base effect suggests the median forecast in Bloomberg's survey of a 0.3% increase will allow the year-over-year rate to slip to 2.5% from 2.7%, the three-month annualized rate was closer to 4%. A 0.3% core rate will keep the year-over-year rate steady at.2.6%. Given that the employment report showed an increase in hiring, the CPI will reinforce expectations for the Fed has entered a pause phase that will extend through the first quarter, which drains the Beige Book of much interest. Along the same vein and pushing in same direction, November retail sales and December industrial output are expected to have risen. Two other reports will likely draw attention. The federal government's December budget balance. Through September, the deficit averaged about 6.4% of GDP. The other data point of note is the November TIC report in the context the US current account position (Q3 deficit will be reported on Wednesday). Through the first half, the US recorded a $690 bln current account deficit, while portfolio capital inflows totaled around $756 bln. 

Prices: Our working assumption has been that the dollar's losses from late November through late December are being retraced. The pre-weekend high in the Dollar Index exceeded the (50%) retracement of those losses (~99.05). The upside correction may not be over. The next retracement target (61.8%) is near 99.40, and 100.00 represents the psychological target.

EMU

Drivers: The euro stalled near $1.18 in the second half of December. The PMI improvement also stalled in December, though German factory orders and industrial production surged in November. The changes in the euro over the past 30 sessions are more inversely correlated with changes in the US two-year yield (~-0.30) than the German two-year yield (~0.01) or changes in the differential (~-0.28). Similarly, over the past 30 sessions, changes in the euro are more inversely correlated with changes in the US 10-year yield (~-0.22) than changes in the German 10-year yield (~-0.17) or the differential (~-0.03). 

Data:The eurozone reports the aggregate industrial production and trade figures in the coming days. Manufacturing output growth may be stalling, and October's 0.8% gain is unlikely to have been repeated. Turning to trade, despite the disruption from the shift in the US trade policy and China's drive, through October, the eurozone trade surplus in 2025 held its own compared to the same period in 2024 (14.47 bln euros vs. 14.41 bln in the Jan-Oct 2024 period). 

Prices: The euro was sold to slightly below $1.1620 ahead of the weekend, the low since December 10. The (61.8%) retracement of its rally since the November 21 low is a little closer to $1.1610. The daily momentum indicators are still falling, suggesting the downside correction may not be over. The 200-day moving average is about 1.1575, and the euro has not settled below it since early last March. 

PRC 

Drivers: Beijing is allowing the yuan to appreciate at a gradual pace. The main way it is achieving this is through lowering the dollar's daily reference rate on a trend basis. There has been speculation in recent months that it was guiding the fix toward CNY7.0, which given the 2% band allows for the greenback to fall toward CNY6.86. 

Data:  China reports its politically sensitive trade figures in the coming days. The China hawk camp argued that given the magnitude of exports to the US, it would not be able to find an offset. Yet, through November, China's trade surplus average $97.8 bln a month compared with $80.7 bln in the first 11 months of 2024. Continuing in dollar terms, Chinese exports rose by 5.9% year-over-year in November while imports rose by 1.9%. 

Prices: While the PBOC set the dollar's reference rate at its lowest since October 2024 (CNY7.0128) last week, the dollar consolidated in its trough against the offshore yuan. It reached CNH6.9665 on January 2, which it has not seen since May 2023. The PBOC's campaign does not seem to be over. The CNH6.90 area may be the next market target, while the low from 2023 was near CNH6.70. 

Japan

Drivers: The rolling 30-day correlation of changes in the dollar-yen exchange rate and changes in the US 10-year yield peaked last year in early August near 0.80. By late December it fell to around 0.20, holding above the low for the year seen in late May below 0.10. It is now slightly below 0.35. The correlation of changes in the exchange rate and Japan's 10-year yield has been all over the board--from -0.33 in late March 2025 to almost 0.40. It is now around 0.15. The correlation between changes in the exchange rate and the 10-year differential recorded last year's high in early September, near 0.80. It fell slightly inverse in late December and is now a little below 0.20. In our monthly outlook, we anticipated the possibility that Prime Minister Takaichi would call for a snap election.Reports circulated at the end of last week that she may dissolve the lower house of the Diet at the start of regular session. We had it toward the middle of the year, but perhaps the heighted tensions with China, are a consideration.  

Data:Japan reports November's current account surplus on January 13. The surplus typically narrows in November (16 of 20 years), but it has widened in two of the past three years in November. A key fact that often that gets obscured is that despite Japan's current account surplus, it runs a trade deficit. Through October, the trade deficit in balance of payment terms was JPY1.52 trillion (~$97.7 bln). That said, on rolling three-month basis Japan has been experiencing a surplus since August. A couple of days later, on January 15, Japan reports December PPI. It rose 2.7% year-over-year in November. Producer prices are proving stickier than consumer prices. In the three months through November, PPI rose at an annualized rate of about 5.2%, the fastest pace of the year. Still, after last month's hike, the swaps market has around a 35% chance of another hike by the end of April, which seems high, and about 40 bp of tightening discounted this year. 

Prices: The dollar rose above JPY158 after the US jobs data, and in doing so, took out the highs from last November and December (JPY157.80-90 area). Options expired before the weekend at JPY158 and a little more than another $1 bln expire there on Monday. Last year's high, recorded in January, was near JPY158.90. MOF officials may issue verbal warnings about the yen's exchange rate. Intervention may be best conceived of as an escalation ladder, and current conditions seem to only permit the climbing of the low rungs. Still, the momentum indicators suggest the risk is on the dollar's upside. 

UK

Drivers: Sterling is slightly more correlated with the Dollar Index, in which it has nearly a 12% weight than the euro over the past 30 sessions (~-0.83 vs. ~0.73). The 30-day correlation was in a range last year of about 0.65-0.90 against the euro and around -0.68 to -0.92 against the Dollar Index. It also is more sensitive to a change in US two-year yield (~-0.34) than UK two-year rates (~-0.15) over the past 30 sessions. 

Data: The main economic report in the coming week is the November GDP and details. The monthly GDP contracted by 0.1% in September and October. It was steady in August after output shrank by 0.1% in July. This makes June that last time that monthly GDP expanded. The median forecast in Bloomberg's survey is for a 0.1% gain, helped by a smaller trade deficit and better services activity, which offsets the more subdued industrial sector. Construction may have stabilized in November after contracting by 0.6% in October, matching its worst performance since February 2024. 

Prices: Sterling has a four-day slide in tow. It reached its best level since last September on January 6 before reversing lower. It did not look back and slipped a little through $1.3400 ahead of the weekend. It tested the 200-day moving average, near $1.3395. The (38.2%) retracement objective of the rally from late November is around $1.3365. The (50%) retracement, which seems more common in sterling, is almost $1.3300. The daily momentum indicators are falling and suggest plenty of room for further losses. The five-day moving average looks poised to fall below the 20-day moving average early in the week ahead for the first time since late November. 

Canada

Drivers:  The Canadian dollar has begun off the new year as the weakest of the G10 currencies. It is off about 1.25% in 2026. The US control of Venezuela's economy and oil may challenge Canada, the world's largest producer of heavy crude. The Canadian dollar may have also fallen victim to corrective forces after appreciating almost 3.5% in the month through late December. Changes in the USD-CAD exchange rate and the Dollar Index are around 0.50, the upper end of where it has been in the most couple of months. The exchange rate is more sensitive to changes in Canada's two-year yield (~-0.35) than the US two-year yield (~-0.01). Lastly, there is an element of risk sensitivity too. The inverse correlation between the exchange rate and the US S&P 500 is near -0.35, near the most in three months. 

Data: Canada reports (November) building permits and December housing starts and existing home sales. The data rarely has much impact on the currency or rates. More telling from a macro point of view is the portfolio flow report. At the same time that Canada's trade deficit deteriorated driven by the changes in US policy, capital inflows slowed dramatically. Through October, net inflows were about C$100.5 bln compared with C$165.3 bln in the first 10 months of 2024. That said, foreign demand improved in H2. Consider that in the four months through October, foreign investors acquired C$126.9 bln of Canada's bonds and stocks compared with C$74.2 bln in the same 2024 period. 

Prices:The greenback looks poised to extend its upside correction against the Canadian dollar. It frayed the (50%) retracement objective of the losses recorded since November 21, which was found slightly above CAD1.3885. The next retracement is near CAD1.3945. That was also in a congestive area in early December. The daily momentum indicators are constructive and an advance toward last month's high around CAD1.4015 cannot be ruled out. 

Australia

Drivers:  The Australian dollar's 30-day correlation with the Dollar Index is around the middle of last year's range (~0.40). It enjoys a higher correlation with changes in the Australia two-year yield (~0.30) than changes in the US two-year yield (~0.06). Over the past 30 sessions, it is more correlated with changes in gold (~0.40) than copper (~0.32). 

Data:  The strength of Australia's household spending is an important factor influencing market expectations that the Reserve Bank of Australia could hike rates toward the end of H1 26. Household spending surged by a heady 1.3% in October, the strongest since January 2024. The year-over-year rate stood at 5.6% in October, up from 2.9% in October 2024. At the same time, Melbourne's consumer inflation expectation (trimmed mean), due at the end of the week, likely remains elevated near the upper end of the two-year range. It stood at 4.7% in November. It was at 3.8% in November 2024. 

Prices: The Australian dollar may have looked promising early last week when it reached slightly above $0.6765 to trade at its best level since October 2024. However, it reversed lower on January 7 and by the weekend had returned to the week's lows set Monday a little below $0.6665. It settled slightly above the 20-day moving average (~$0.6680). It has not closed below it since late November. It found bids in front of $0.6665. near the shelf recently forged around $0.6660. The $0.6635 area is a retracement target, and if that gives way, $0.6600 beckons. 

Mexico

Drivers: We suspect the peso's robust performance is a function of its relatively high yield and low volatility, but it is hard to tease it out of the data. The changes in the dollar against the peso and changes in US two-year yields are around -0.15 inverse correlation over the past 30 sessions. Changes in the dollar against the peso and changes in the greenback against the yen and Swiss franc, other candidates of for funding currencies are positively correlated over the past 30 sessions (~0.30 and ~0.45, respectively). Changes in the dollar against the peso and changes in the Dollar Index are the highest among the variable we tested near 0.50 in the past 30 sessions. The correlation was in a range last year between about -0.20 in February to a little above 0.80 in late September. 

Data: Mexico reports December nominal wage growth and October private consumption. Mexico's minimum wage has risen by double digits each year since 2017. It will rise by 13% this year, though there is some regional variance. Note that around 55% of Mexican workers are in the informal economy, roughly split between unincorporated household businesses and other micro-business and employees of legally register businesses but without contracts or labor protections. On Thursday, Mexico will report October private consumption. It fell in the four of the first five months of 2025 but recovered in the second half. It rose by 3.6% year-over-year in September, the largest gain since July 2024. 

Prices: The dollar made a marginal new four-week high against the peso ahead of the weekend, slightly above MXN18.04. The greenback stabilized and settled back below MXN18.00. The five-day moving average is threatening to cross above the 20-day moving average for the first time in two months, but this is the result of the sideways movement. Given the carry, the sideways movement might not squeeze out the peso longs. Still, there may be near-term potential toward MXN18.09. It might take a break of MXN18.14-15 to shake out some of the weak peso longs. 

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