The US dollar mostly consolidated against the G10 currencies last week, though the combination of firm data and the shrugging off of the latest administration attempt to influence Fed policy gave it a firmer bias. Japanese officials have taken several steps up the intervention ladder with verbal threats and this has stabilized the yen, without facilitating much of a recovery. When everything was said and done, the yen finished the week little changed after trading at its lowest level since July 2024. The reaction to the verbal intervention has been sufficient, though, we suspect, to reduce the chances/need for material intervention. Still, the effects of the verbal intervention could be unwound if Prime Minister Takaichi calls for a snap election at the end of next week as some reports suggest is likely. The Bank of Japan meets next week and is widely expected to stand pat, with the next hike not fully discounted by the swaps market until July. Norway's central bank also meets next week. It is on hold, with the swaps market holding out the possibility of a cut later this year.
While the subpoenas to the Federal Reserve caused an initial stir, the attempt to influence US monetary policy is likely to fail, preserving the central bank's independence from partisan politics. And the dollar turned better bid in pre-weekend dealings after President Trump seemed to downplay the likelihood that Hassett, the Director the the National Economic Council would be nominated to succeed Chair Powell. Stll, despite the wide disparity of views reflected in last month's Summary of Economic Projections, recent comments suggest that Governor Miran may be the only dissent from a standpat policy when the FOMC meeting concludes on January 28. The Supreme Court hears arguments about President Trump's efforts to dismiss Fed Governor Cook and it may also rule on the president's use of emergency powers to impose tariffs. Meanwhile, the PBOC has continued its campaign to allow the yuan to gradually appreciate it by lowering the dollar's reference rate. It has approached CNY7.0, which has been thought to be the target. Both Canada and the EU appear to have struck limited trade agreements with China, while President Trump suggested he may allow Chinese investment in US auto production.
USD
Drivers: Even though the Justice Department's criminal investigation into Federal Reserve Chair Powell's testimony about the renovation of the central bank's headquarters seemed to cut short the dollar's upside correction that began around Christmas, the impact on policy is negligible. There is bipartisan support for the Fed's independence. The derivatives market anticipates the Fed to be on hold until late in Q2 at the earliest. Some banks are reconsidering their outlook for the Federal Reserve this year, but the market is pricing just about two cuts this year, while last December’s FOMC meeting saw a median dot for only one cut. Over the past 30 and 60 days, the correlation of changes in the Dollar Index and two-year US yields is at the lower end of where it has been in the last eight months (~0.38-0.40).
Data: With the markets convinced that the Federal Reserve is on the sidelines, this week's data poses little more than headline risks. Moreover, with December CPI and PPI in hand, November PCE deflator is of little consequence, while the income and consumption data will help economists fine tune Q4 GDP projections, which also renders Q3 GDP revisions (January 22) moot. The preliminary January PMI will be reported the following day, but the market seems to put more weight on the ISM than PMI. President Trump has suggested he will use his speech at the World Economic Forum in Davos (January 19-23) to announce new policy initiatives.
Prices: Our working hypothesis has been that the dollar is correcting higher from the decline from last November (~100.40) to the low around Christmas (~97.75). It marginally surpassed the (61.8%) retracement objective near 99.40 last week. The momentum indicators are still constructive but are getting stretched. Minor new highs are possible, but we are looking for some reversal pattern to indicate a top is at hand.
EMU
Drivers: The new front in the tension between the Trump administration and the Federal Reserve arguably helped the euro bottom near $1.1600. The euro may have been weighed down by the widening of the US two-year premium from about 133 bp to 147 bp, the most in about a month. The premium has not been above 150 bp since around November 21. The inverse correlation with the US two-year yield stronger than the inverse correlation with Germany's two-year yield (-0.34 vs. 0).
Data: The eurozone reports November current account on January 20. It averaged almost 26.4 bln euro a month through October, which is about a quarter smaller than recorded in the year ago period. Germany's current account surplus narrowed to an average of 16.7 bln euros in the first ten months of 2025, down about 22% from the average of Jan-Oct 2024. The ECB forecasts the current account surplus of 2.7% in 2024 narrowed to 1.9% in 2025 and to 1.7% this year and next. Germany's ZEW survey is also due January 20. Recall that in December, the expectations component rose to 45.8, a five month high and well above the 15.7 reading in December 2024. The current assessment moved in the other direction and at -81.0 in December was the poorest since last May. The preliminary January PMI will be reported at the end of the week. In December, the manufacturing PMI was at 48.8 and the service PMI stood at 52.4. The composite PMI finished last year at 51.5, pulling back after improving for six consecutive months. It was above the 50 boom/bust level every month in 2025 after it finished 2024 at 49.6.
Prices: The euro surpassed the (61.8%) retracement of the rally from the November 21 low (~$1.1490) last week when it recorded a low slightly below $1.1585 at the end of last week. It frayed the200-day moving average, found near $1.1590. The euro has not settled below it since last March. The momentum indicators are getting stretched. A convincing break of it could target the $1.1520 area, while regaining a foothold above $1.1650 would help stabilize the technical tone.
PRC
Drivers: Since last April or May, the PBOC has been allowing the yuan to appreciate at a gradual pace. The high fix was recorded in the middle of last April at CNY7.2133. Last week it was set below CNY7.01 for the first time since May 2023. As the fix approaches CNY7.0, which has been anticipated for several months, it will be watched closely for signs that officials may have reached their objective. Given the 2% band the dollar is allowed to trade around the daily fix, a CNY7.0 fix allows the dollar to trade to CNY6.86. Although December CPI rose to its highest level in almost three years, the strength of the yuan may still allow the PBOC to ease monetary policy to support the economy. Over the past 60 sessions, changes in the offshore yuan and the Dollar Index are about 0.50 correlated. Since last August, the rolling 60-day correlation has moved between around 0.40 and 0.65.
Data: Many observers seem to have a selective mistrust of Chinese data. They often are skeptical of the veracity of the real sector data, including the current account and GDP, for which the Q4 report is slated for release early Monday, January 19. However, when it comes to foreign exchange settlement, fixed asset investment, its trade surplus, or the dour readings on the property market, observers tend to be more accepting. In the US, few would confuse retail sales with consumption, yet many use China's retail sales as proxy for consumption. In addition to Q4 GDP, Beijing reports on December real sector data, including retail sales, industrial output, and investment. Matching Q3 GDP growth of 1.1% would put 2025 GDP at around 5%.
Prices: The dollar reached almost CNH6.9610 before the weekend, a marginal new low since May 2023. Officials and their proxies seem to be trying to manage the pace of the dollar's decline/yuan appreciation. With the fix drawing near CNY7.00, we are anticipating a consolidative phase shortly. This could see the greenback recover toward CNH6.98-CNH6.99.
Japan
Drivers: The rolling 30-day correlation of changes in the dollar-yen and the US 10-year yield peaked in late August 2025 slightly below 0.80. In late December, it had fallen to below 0.20 to its weakest level since May 2025. It has rebounded to around 0.45 now. The 30-day correlation of the exchange rate and the 10-year JGB yield is near 0.25. Last year's high was recorded in February a little below 0.40. The correlation was inverse for most of the March-June 2025 period and again from August through most of October. The rolling 30-day correlation of the 10-year differential peaked in October around 0.75 and is now below 0.10. There is more speculation in the Japanese press of an early election. While we had suggested something toward mid-year, local press reports have suggested a call can be made toward the end of next week for an election in February. Prime Minister Takaichi and the cabinet enjoy high support in opinion polls. That said, a strong popular mandate is generally seen as bearish for the yen. Meanwhile, the threat of material intervention seemed to have steadied the yen.
Data: The highlight of the week is the Bank of Japan meeting that concludes at the end of the week. However, there is little doubt that it will stand pat as it provides new macroeconomic projections. After the recent disappointing labor earnings, Japan is likely to report an easing of price pressures in the December CPI, due a little before the BOJ's statement. Recall that Tokyo’s December CPI eased to 2.0% from 2.7% and the core rate, which excludes fresh food and energy slipped to 2.3% from 2.8%. Japan will also report the final November estimate of industrial output (initial estimate was a 2.6% month-over-month decline) and the tertiary (service) sector activity report. In October, it rose by 0.9% after a flat August-September performance. December trade figures are due January 22. There is a strong seasonal pattern for the trade balance to improve in December. The surplus was almost JPY317 bln in November. The average monthly deficit in the first 11 months of 2025 was about JPY250.6 bln compared with an average monthly shortfall of JPY522.6 bln in the first 11 months of 2024. Note that in November for the first time since the US declared "Liberation Day" in April, Japanese exports to the US rose (~8.8%). The value of vehicle shipments increased by 1.5% while the number of vehicles increased by 7.7%, which supports arguments that Japanese producers have cut prices ostensibly to preserve market share.
Prices: The dollar reached almost JPY159.50 last week. It last traded above JPY159 in July 2024, when BOJ intervention helped capped the greenback near JPY162.00. The threat of material intervention, enhanced by apparent concerns about the yen's weakness from US Treasury Secretary Bessent, saw the dollar trade below JPY158 ahead of the weekend for the first time in three days. Although officials claim that the exchange rate does not reflect fundamentals, the risk of an early election is understood to be yen-negative through the policy implications. In order to squeeze yen shorts, the dollar probably has to fall through JPY157.40 and possibly JPY157, around where the 20-day moving average is found.
UK
Drivers: Sterling sensitivity to the broad dollar movement (Dollar Index as proxy) has increased. The rolling 30-day correlation of changes in near -0.85, near the most extreme since late October. The 60-day correlation is near -0.82 after having diminished to the least since September earlier this month. The 60-day correlation between the exchange rate and the US two-year yield is near -0.35, among the least sensitive since last June. The 60-day correlation with the UK two-year yield has been positive since last year, and around 0.04 is the most since late 2024.
Data: It is an important week for UK data. The diary includes reports policymakers and investors are typically sensitive to: labor market, CPI, and retail sales. However, deeply held ideas that the Bank of England will cut rates again until Q2 takes some of the edge off this week's reports. For the record, though, UK CPI is among the highest in the G10 countries at 3.2% in November, while the 5.1% unemployment rate (October) was the fifth highest. Perhaps given the faltering support for Labour and Prime Minister Starmer, the budget data early on January 22 may draw attention. The Office for Budget Responsibility estimates the FY25 deficit at around 4.5% of GDP (5.2% in 2024) and 3.5% in FY26. The preliminary PMI may pose headline risk. The composite PMI ended 2025 at 51.4 compared with 50.4 at the end of 2024. However, it averaged 51.1 in 2025 and 52.5 in 2024 and 51.2 in 2023.
Prices: Despite better-than-expected November monthly GDP (0.3%, the strongest since June), sterling struggled. On January 15, when the GDP was published, sterling was sold to its lowest level since December 19, slightly below $1.3365. It was retested and held ahead of the weekend, but the upticks were not impressive. Re-establishing a foothold above $1.3450 would be mor encouraging. The daily momentum indicators are still falling. A convincing break of the $1.3365 area could spur another leg down toward $1.3300.
Canada
Drivers: The Canadian dollar showed little reaction to the deal Prime Minister Carney struck with Beijing that allows 49k Chinese-made EV at the most-favored-nation tariff rate of about 6.1%. China will lower its tariff on Canada's canola to 15% from 85%. The US dollar's upside correction of the drop from the November 21 high (CAD1.4130) stalled but it does not appear over. The US dollar's changes against the Canadian dollar are about 0.55 correlated with changes in the Dollar Index over the past 30 sessions, which is the strongest in a little more than two months.
Data: The Bank of Canada acknowledged last month that the high degree of uncertainty means that it does not know when in what direction it will move policy rates again. The market is fairly confident of an extended pause with the next move being a hike. Pricing in the swaps market is consistent with a 60% chance of a hike by the end of the year. Next week's high-frequency data includes December CPI and November retail sales. The Bank of Canada will also publish its Q4 outlook, which will likely formalize the thrust of last month's record of its meeting. On year-over-year basis, Canada's CPI averaged 2.0% in the first 11 months of 2025 and 2.4% in the same period in 2024. It stood at 2.2% in October and November 2025. The underlying measures are firmer. The median and trimmed core readings were at 2.8% in November, and BOC Governor Macklem has suggested the central bank thinks this is overstated. Meanwhile, retail sales were soft in 2025. Through October, they fell by an average of 0.1% a month, and the broader measures, household consumption, contracted in Q3 25 for the first time since Q2 21.
Prices: The US dollar stalled in front of the (61.8%) retracement of its losses from the November 21 high near CAD1.4130. The retracement target is about CAD1.3945. The greenback spent most of last week inside the range set on January 9 (~CAD1.3860-CAD1.3920). The choppy consolidation looks bullish, and another attempt at CAD1.3945 looks likely. A break of it could spur a move into the CAD1.4000-20 area, which given the position of the momentum indicators, could end the move.
Australia
Drivers: The Australian dollar has begun the new year on firm footing and through last week was the strongest currency among the G10. In fact, it is the only G10 currency that has risen against the dollar here in early 2026. Over the past 30 sessions changes in the Aussie and the Dollar Index are inversely correlated by about -0.45. Recall that in Q3 25, it was mostly around -0.7 to -0.8. It was near -0.15 last January, which was the weakest since late 2015. Over the past 60 sessions, the correlation of the changes in the Australian dollar's exchange rate and Australia's two-year yield is near 0.82, the more robust in four years.
Data: Australia reports December jobs data on January 22. It lost 56.5k full-time posts in November, the most since the end of 2023. Through last November, Australia created an average of almost 7k jobs a month compared with an average of 27k in the first 11 months of 2024. The unemployment rate ended 2024 at 4.0% and rose to 4.3% in H1 25 and mostly stayed there in H2 25. The rise in the unemployment rate came as the participation rate fell to 66.7% in November from the cyclical high set in January at 67.2%. The preliminary January PMI is due the following day. The composite finished 2025 at 51.0, having decline in three of the last four months after peaking in August at 55.5. It averaged 52.0 last year and 51.0 in 2024.
Prices: The Australian dollar traded above $0.6700 in every session last week but has not settled above it since Monday. It stalled last Tuesday slightly below $0.6730, where the (61.8%) retracement of the losses since the two-year high was set on January 7 (~$0.6765) was found. A base has been forged near $0.6660. The momentum indicators are falling, and the five-day moving average has slipped through the 20-day moving average. A break of $0.6650 could spur another half-cent decline.
Mexico
Drivers: Latam currencies account for five of the top six emerging market currencies at the start of the year. The Russian ruble joins them. What they have in common are relatively high interest rates, and some would add, commodities exposure, though it fits in less with Mexico, where the peso's gain of about 1.7% puts it in second place behind the Colombian peso's nearly 2.2% appreciation. Carry trade strategies seem to be the key driver for the Mexican peso, and a sense that it has fared better than many, including Canada, under the shift in US policy.
Data: Mexico reports November retail sales and the IGAE economic indicator, which is a proxy for a monthly GDP. Retail sales were firm in 2025 and rose by an average of 0.3% a month. In the first 10 months of 2024, retail sales slipped by an average of 0.1%. The IGAE indicator began Q3 on a constructive note. It rose by 0.98 in October, its strongest monthly reading since July 2024. If both data points are in line with expectations, it will reinforce the sense that the central bank has begun an extended pause and may, in fact, be done with its easing cycle. Also, Mexico will report H1 January CPI figures. The headline rate (3.66%) is in the upper end of the 2%-4% target range, and the core rate (4.31%) is above it.
Prices: The peso rose to its best level since July 2024 last week that saw the greenback broadly consolidate. The dollar fell to MXN17.62 on January 15 before it consolidated ahead of the weekend. Our MXN17.60 call looks too conservative. The next technical target below there may be around MXN17.38, and then MXN17.00. Resistance is seen in the MXN17.80-MXN17.85 area.
Reviewed by Marc Chandler
on
January 17, 2026
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