Image Source: Unsplash

President Trump backed away from threatening to use force to acquire Greenland and dropped the tariffs on several European countries slated to go into effect on February 1. Europe's threat to break from the recent trade agreement with the US was also rescinded. After a rough start to the week, another source of market stress, the sell-off of Japanese bonds, also stabilized. Yet, the dollar found little succor. 

Japanese officials took another step up the intervention escalation ladder with stronger word cues after the Bank of Japan left policy on hold. While it stabilized the yen, the market seemed comfortable jobbing the market between about JPY158 and JPY158.50. However, near midday, it appears that the Fed called to check on rates, which is not unusual in itself, but what got the attention was that it said it was doing so on behalf of the US Treasury. This a different kettle of fish, and the market sold the dollar off broadly, and the greenback fell to about JPY155.90, the low for the month. We suspect Friday's dollar sell-off was exaggerated, but the technical indicators warn of more downside risk even after some backing and filling. 

The cat-and-mouse game with the yen is likely to carry over to the new week's activity, but the one-way market has been broken, at least for the time being. The highlight in the week ahead are the Federal Reserve, Bank of Canada, and Norway's central bank meeting. None are expected to move. It is also possible that President Trump nominates the successor to Chair Powell at the Federal Reserve. Powell's decision about serving out the rest of his term as governor (until January 2028) is unlikely to be announced until closer to the end of his term as chair (May), perhaps as early as late Q1.  

U.S.

Drivers: We have often argued that "abdication" is the bigger risk to the dollar than "encroachment", and US actions lend credence to this framing. The administration's attempt to drive monetary policy and its threat of taking land from a NATO country has further soiled the brand. These considerations have loosened the dollar's link to US rates. The rolling 30-day correlation of changes in the Dollar Index and the US two-year yield is inverted for the first time since October 2022. Politics are trumping economics and investors appear to be demanding a higher premium to hold the dollar. The US two-year premium over Germany widened to over 150 bp last week, the most since last November, before it settled slightly below there. The Dollar Index not only snapped a three-week advance but unwound around 2/3 of it. 

Data: The US sees some high-frequency data that will help economists forecast Q4 GDP, like trade and factory/durable goods orders. However, the highlight of the week is the FOMC meeting. It is not what it will do because it will do nothing. Instead, is will likely provide more evidence that a new chair who wants to cut rates in line with the Trump administration's explicit wishes and articulated by Governor Miran will find an uphill struggle. It is possible that Governor Bowman dissents from what there is little question will be a standpat decision. In this context, it is also noteworthy that the Atlanta Fed's GDP tracker puts Q4 GDP at 5.3%, which is accurate would be the strongest quarter performance since the recovery from the pandemic in 2021. Before that, one has to go back 2014 for the last time quarterly growth exceeded 5% at an annualized pace.

Prices: The Dollar Index leg up that began around Christmas (~97.75) stalled near 99.50 in mid-January and was retested at the start of last week. It was sold to almost 97.40 ahead of the weekend and settled below the lower Bollinger Band (~97.65). The next technical target may be around 97.20. 

EMU

Drivers: The self-inflicted damage to the US dollar gave the euro its biggest impetus higher. The euro posted a bullish outside up day last Tuesday after slipping briefly through $1.1575, its lowest level since the end of last November. It had fallen a little more than two cents since Christmas Eve, and its sharp recovery appeared to catch many short-term traders wrong-footed. The euro's gains were scored despite (because?) the sharp widening of the US two-year premium over Germany.

Data: Eurozone money supply growth and lending figures may have once moved the capital markets, but that is not the case now. Nor does the ECB's survey of one- and three-year inflation expectations typically move the market. Instead, the highlight will come at the end of the week with the first estimate of Q4 GDP and the December unemployment rate. Germany reported at its economy expanded by 0.2% in Q4, and the Bloomberg survey found the median forecast was the same for the aggregate performance. We suspect the risk is on the upside and the region may have matched the 0.3% quarterly growth posted in Q3. In 2025, unemployment across the monetary union moved back and forth between 6.3% and 6.4%. The record low under EMU was recorded in late 2024 at 6.2%. It was at 6.3% in November, which is notable given lackluster growth. Last year may have been the first year since 2022 that the regional economy expanded by more than 1%. 

Prices: The euro traded to nearly $1.1835 ahead of the weekend, its best level since last September 2025. The five-day moving average has crossed above the 20-day moving average, and daily momentum indicators have turned higher. There is little on the charts ahead of last year's high recorded when the Fed cut rates on September 17 ($1.1920). Support now may be in the $1.1770 area. 

PRC

Drivers: Beijing is continuing to allow the yuan to appreciate. It has lowered the dollar's reference rate to slightly below CNY7.0 before the weekend for the first time since 2023. The CNY7.0 had been thought of as the "target" for some time. There are reports that state-owned banks are buying dollars, which could be a combination of commercial transactions, related to increased trade, and possibly assisting official efforts to manage the pace of the yuan's appreciation. But that does not seem like the takeaway. The signal is that Chinese officials are allowing the yuan to appreciate. To be sure, it is still small beer. The onshore yuan is up less than 0.35% this year, and offshore yuan has risen less. With disappointing data in tow, a small reduction in interest rates seems increasingly likely. 

Data:China reports industrial profits in the first part of the week ahead and the January PMI on Saturday, January 31. Beijing's effort to curb the excess investment that has been dubbed "involution" appears to be yielding results, though it is too early to have much confidence. One sign would be improved profitability. And the cumulative year-to-date, year-over-year measure has risen in the four months through November. Yet, there has been increased profitability for a few months previously, like in the first eight months of 2024 without signaling a structural change. Separately, the PMI is seen capturing the broad economic trends. The composite PMI slipped below the 50 boom/bust level last November for the first time since the end of 2022 but rebounded to 50.7 in December, matching the high print since last March. In December, both the manufacturing and non-manufacturing PMI were slightly above 50 (50.1 and 50.2, respectively). 

Prices: The dollar was sold slightly below CNH6.95 last Tuesday and spent last few sessions mostly sideways in the trough. On January 22, it frayed the 20-day moving average (~CNH6.9755) for the first time in two months but and fell to around CNH6.9485 before the weekend. Given the dollar's broad weakness ahead of the weekend, the greenback looks vulnerable to start the new week. In the medium term, the risk may extend toward CNH6.80. 

Japan 

Drivers: The rolling 30-day correlation of changes in the dollar's exchange rate against the yen and the US 10-year yield peaked last August near 0.80. It trended to lower to about 0.20 by late December. After rising a little above 0.50, it is eased back to around 0.30. The exchange rate's correlation with the Japanese 10-year yield peaked below 0.40 last February and was mostly between -0.30 and +0.30 until Q4 where it remained positive and mostly below 0.30. It is now a little below 0.20. After the BOJ left rates on hold last week, there was a quick sell-off and then a recovery in the yen. Despite some speculation of material intervention, we suspect the heightened verbal intervention (and possibly a check on rates) was sufficient to get the market to push away from JPY159. Even though the LDP's former ally, the Komeito Party has joined with the Constitutional Democratic Party, the public support for Prime Minister Takaichi seems to be greater. Her policies appear to be a drag on the currency, though it is harder to quantify. The long end of the Japanese bond market stabilized over the past few sessions, but many participants seem to doubt that officials can contain bond yields and prevent the yen from falling at the same time. 

Data: With the Bank of Japan standing pat last week and the election set for next month, the high-frequency data may have limited impact. Yet, it also may help explain the central bank's very gradual approach to normalizing monetary policy. First, Tokyo January CPI, at the end of the week, is a reasonably good guide to the national figures. It peaked last year in May at 3.4% and was at 2.0% in December. The core rate, which excludes fresh food, fell to 2.3% in December from 2.8% in November. With labor cash earnings having risen a miserly 0.5% year-over-year in November, conventional economic models non-accelerating price pressures. Japan will also report December unemployment (2.6% in November), retail sales, and industrial production figures. Recall that the world's third largest economy contracted by 2.3% in Q3 25 at an annualized pace. The median forecast in Bloomberg's survey is for a rebound to 1.2% annualized growth in Q4 25. The Bank of Japan estimates year-over-year growth of 0.9% in 2025 (-0.2% in 2024) and 1.0% this year. 

Prices: After the BOJ meeting concluded before the weekend, the dollar jumped to almost JPY159.25. The finance minister used word cues to indicate heightened risk of material intervention and the greenback tumbled slightly below JPY157.40 in Europe and took another leg lower as European markets closed for the week. It fell to JPY155.65 in the North American afternoon and recorded a large outside down day (bearish implications). There was market talk that the Fed checked rates (which is not unusual in itself) and said it was doing so on behalf of the US Treasury (which is unusual). It gives the appearance of verbal intervention by the US. The greenback settled below the 20-day moving average (JPY157.45) for the first time in nearly a month. Assuming the BOJ did not intervene, despite some speculation, the need to materially intervene has been undermined by the price action. The dollar's 1.5% loss before the weekend was its largest setback since last August 1, but the yen bears are unlikely to give-up. 

UK

Drivers: Sterling remains sensitive to the overall direction of the dollar, but the rolling 30-day inverse correlation of changes in sterling and the Dollar Index is near -0.70, the least since last August. After sterling spent most of the past eight months inversely correlated with changes in the UK's two-year yield, it is now slightly positive (~0.15). The correlation of changes in sterling and the two-year US yield was positive last March and early April, but the inverse correlation is now almost -0.30. The inverse correlation between changes in the exchange rate and the US two-year discount to the UK is around -0.20. 

Data: The UK reports consumer credit and mortgage lending data, not exactly the kind of data points that typically move the markets. After the stronger than expected November GDP (0.3%) reported in mid-January, the market seems to accept that the Bank of England will not be in a hurry to deliver the next rate cut. In the swap market, the odds of a cut in Q1 fell from nearly 50% at the end of last year to about a 1-in-5 chance. The base rate that now sits at 3.75% is seen around 3.45% at mid-year, up from about 3.40% at start of the year. 

Prices: Sterling recovered smartly from the one-month low set at the start of last week, near $1.3330. It reached $1.3645 ahead of the weekend, the highest level since the day after the Federal Reserve delivered its first rate cut last year on September 17. It reached $1.3725 on Fed Day, while the 2025 high was recorded on July 1 by $1.3790. The momentum indicators have turned up from the middle of the range, and the five-day moving has crossed back above the 20-day moving average, after whipsawing earlier this month. Initial support is seen in the $1.3480-$13500.

Canada 

Drivers: The wild card is the US. Initially President Trump did not seem to object to the trade rapprochement between Canada and China but seemed to grow testy after Prime Minister Carney's widely acclaimed speech at Davos. Carny stressed the end of the world order that the US fostered. Canada clearly is more sympathetic to Europe's position regarding Greenland than the US administration. Canada is also vulnerable to the USMCA review. Changes in the US dollar against the Canadian dollar and the Dollar Index is a little above 0.70, the strongest since the end of last September. Although some observers insist that the Canadian dollar is a petrocurrency, the correlations with changes in WTI are most often minor. In Q4 25, the rolling 30-day correlation flirted with a positive reading in October but switched to an inversion in early November and reached about -0.30 last month. The 30-day correlation is slightly inverse now (-0.06). 

Data: The Bank of Canada meets in the middle of the week. There is practically no doubt that it stands pat. The swaps market accepts that the Bank of Canada's easing cycle is complete and has almost an 85% chance of a hike at the end of the year. Canada reports November merchandise trade figures on Thursday. Through October, Canada reported a C$28.7 bln deficit compared with an C$8.3 bln shortfall in the first 10 months of 2024. And this may understate the case. Consider that October's C$583 mln deficit was reduced by strong gold exports, without which the deficit would have been about C$8.2 bln. The key disruption is clear. The share of Canada's exports to the US fell 3.4% in October to around 67.3%, the lowest outside the Covid disruption since at least 1997. At the end of the week, Canada reports November CPI. StatsCan provided a flash estimate of 0.1% growth after the 0.3% contraction in October. Still, growth in Q4 has downshifted from 2.6% annualized pace in Q3, after which it shrank by 1.8% in Q2. The median forecast in Bloomberg's survey is for 0.5% annualized growth in Q4. The Bank of Canada expects the economy expanded by about 1.2% last year and projects 1.1% growth this year.

Prices: The US dollar will begin the new week with a five-day decline in tow. The US dollar stalled on January 15, near CAD1.3930 and at the end of last week traded to about CAD1.3695. It overshot the (61.8%) retracement of the rally from the low the day after Christmas (~CAD1.3645) to the mid-Jan high, which was found by CAD1.3750. The next technical target is the five-month low recorded on the day after Christmas around CAD1.3635. Still, the Canadian dollar's roughly 1.4% gain last week meant that it underperformed. Only one G10 currency did worse last week, the Japanese yen. The other dollar-bloc currencies were up more than twice as much. The Canadian dollar typically underperforms in a weak US dollar environment. 

Australia

Drivers: The bullish story for the Australian dollar remains intact and it is competing with the New Zealand dollar for the best performing G10 currency to start the year. They are up about 3.1% and 3.0%, respectively. The Kiwi appears to have mostly been lifted by the Aussie's strength, which in turn has been bolstered by market bringing forward the first hike after a mini cutting cycle last year. Exposure to industrial metals and rare earths supports it and attracts international M&A interest. The inverse correlation of almost -0.50 between changes in the Australian dollar and the Dollar Index is around the most extreme since last October. The correlation between changes in the Aussie and Australia's two-year yield is around 0.35, the upper end of where it has been for the past six months. The 30-day correlation between the Australian dollar and the two-year US yield is practically zero, and the correlation with changes in the two-year spread is only slightly better (~0.16). 

Data: The highlights this week are the Q4 CPI print and December private credit. In Q3 25, CPI rose 3.2% year-over-year, and the underlying trimmed mean (3.0%) and weighted median (2.8%) a little less. The monthly readings warn of upside risks. The monthly CPI averaged almost 3.3% year-over-year in Q3 and in October-November averaged 3.6%. Meanwhile, private credit continued to grow robustly, averaging a little more than 0.6% a month for the six months through November. The 12-month moving average is at 0.6%, the highest in nearly three years. Barring a significant surprise, the market sees the Reserve Bank of Australia as among the most likely in the G10 to hike rates this year. The better-than-expected employment data spurred the futures market to boost the chances of a hike at next month's meeting on February 3. The odds rose to almost 60% at the end of last week from about 25% at the end of previous week. 

Prices: Encouraged by strong economic data and heightened speculation of a rate hike in the first week in February, the Australian dollar rose every session last week and snapped a three-week decline with a nearly 3% gain. It reached almost $0.6900 before the weekend, its best level since October 2024, when it reached $0.6940. In the past two sessions, the Aussie has traded a little more than three standard deviations above the 20-day moving average. The Bollinger Band is set at two standard deviations. While we anticipate further gains over the medium term, it is looking a bit stretched now for new buyers. 

Mexico

Drivers: The Mexican peso has risen by around 3.5% at the start of 2026 and has reached its best level since June 2024 and the run-up to the Mexico's election that year. Although President Sheinbaum is popular and has gotten high marks for dealing with the mercurial American president, there is also a regional development taking place. Four of the top five emerging market currencies are from Latam and the peso is the worst performer of the bunch. Carry, followed by commodity exposure, seems to be the two key drivers in the region. 

Data:  Data this week will illustrate the attractiveness of the Mexican peso. First, the Mexican economy has proven fairly resilient to the change emanating from the US. Unlike Canada, Mexico's trade deficit has been reduced sharply. In the first 11 months of 2024, Mexico reported an average monthly trade deficit of about $1.85 bln. In the January-November 2025 period, the average monthly shortfall fell to a little more than $150 mln. The December trade balance will be reported on January 27. There is a strong seasonal pattern of improvement in December. Mexico reported nearly $663 mln trade surplus in November. The first estimate of Q4 GDP will be unveiled at the end of the week. Recall that the economy contracted by 0.3% in Q3 and the year-over-year rate fell by 0.1% for the second consecutive quarter. A rebound likely was began in Q4, and the median forecast in Bloomberg's survey is for a 0.2% growth in Q4, which would lift the year-over-year rate to 1%. Data, broadly in line with expectations, will reinforce ideas that Mexico's overnight rate is likely to be stable at 7.0% in the coming months. 

Prices: The dollar took out our MXN17.38 target before the weekend and reached its lowest level since mid-2024. It reached about MXN17.3590 in the broad based dollar sell-off. The momentum indicators are getting stretched, which may temper the enthusiasm for new peso longs. Still, over the medium-term, a push toward MXN17.00 seems increasingly likely. The low from April 2024 was near MXN16.26, the lowest since end of 2015. It was near the 200-month moving average, which is now found slightly below MXN17.00. 

More By This Author:

BoJ Maintains Steady Policy, Heightened Intervention Watch
A Collective Sigh Of Relief
Eerie And Nervous Calm In Capital Markets