The US dollar rose against the G10 currencies last week but the Australian and New Zealand dollars. Without much in the way of new supportive developments, we frame its gains primarily in technical terms after the dramatic sell-off the appears to have been spurred by the bellicose nature of the US attitude toward Greenland. The nomination of Warsh to succeed Powell as Fed Chair seemed to have sparked a correction in several markets. Meanwhile, after a couple of soft labor market indicators, the market feels more confident of at least two Fed cuts this year. The dollar traded mostly lower ahead of the weekend, but the momentum indicators suggest the upside correction may not be over.
The market's fear of intervention faded as the February 8 Japanese election drew near. The yen was the weakest of the G10 currencies last week, falling almost 1.5% against the greenback. A surge in German factory orders did not translate into an increase in industrial output. The ECB stood pat, as expected, and President Lagarde played down the impact of the euro's appreciation on the outlook for monetary policy. The Bank of England delivered a dovish hold and the market's confidence of a cut in April rose (~95% chance vs. 74% a week ago). Next week's highlights include the delayed US January jobs report and what is expected to be a softer CPI. China reports January CPI and PPI as well. The PBOC continues to lower the dollar's fix on a trend basis. The UK reports Q4 GDP. Meanwhile, polls suggest that the LDP will bolster its standing in the lower house in Japan's election on February 8, which will be seen as a broad mandate for Takaichi.
US
Drivers: There seems to be two main considerations for the broad movement of the greenback. First is a correction after being extremely stretched from a technical perspective. The momentum indicators suggest it still has run to run. Second, and arguably, where triggered the technical correction was the nomination of Warsh to the Fed's helm. It is not simply that Warsh was a hawk when he was a governor at the Fed, but that a more extreme or perceived to be more politicized candidate was not chosen. The Fed funds futures are discounted about 49.5 bp of cut this year, little changed from before the nomination.
Data: It now seems to be widely recognized that vast majority of US tariffs have been paid for by domestic parties that import/export prices lose some interest. December retail sales are expected to show that the despite heighted debt stress levels, American households continue to expand goods consumption. January retail sales (February 17) will be dragged down by the poor vehicle sales. Due to the recent government shutdown, the delayed January jobs report will now be reported February 11. The median forecast in Bloomberg's survey is for a 70k increase in nonfarm payrolls (50k in December) but given the methodological adjustments (birth/death of small businesses and new census population estimates), comparisons may be distorted. In any event, the job growth is hardly better than flat if one assumes, as Fed Chair Powell has suggested, that nonfarm payrolls may be overstated by around 60k, and while the Employment Cost Index may be commonly seen as a gauge of inflation, the December CPI will overshadow it. The headline and core rates are seen rising 0.2% and 0.3%, respectively. Given the base effect, this suggests a year-over-year rate of around 2.4% (from 2.7%) for the headline. Last year's low watermark was 2.3%-2.4% March through May. The core rate could also slow to 2.4% from the 2025 low of 2.6% in November and December. It would be the slowest core CPI since Q1 21.
Prices: The Dollar Index stalled at the end of last week near the (61.8%) retracement objective of the sharp sell-off in the second of January, arguably fueled by the US seeming to welcome a weaker dollar and the aggressive threats on Greenland. The momentum indicators are still trending up and are not over-extended. A push above 98.00 could signal a move toward 98.60 next. The mid-January high was near 99.50.
EMU
Drivers: The euro is correcting a seven-session rally that carried it from around $1.1575 to $1.2080. A technical correction is underway, and it does not look complete. The US two-year premium over Germany rose in the first part of January and peaked as the euro bottomed January 19-20. It gradually narrowed during the dollar's slide. We suspect it will begin widening again, but we will be monitoring it for confirmation.
Data: The eurozone data features another look at Q4 25 GDP, with some more details and the aggregate December trade figures. The data is likely to have a muted effect at best.
Prices: The euro met the (61.8%) retracement target of is run-up from the January 19 low (~$1.1575) to the late January high (~$1.2080) that was found near $1.1765. The downside momentum seemed to stall last week, but the momentum indicators are still falling. A move above $1.1840 would help stabilize the technical tone but the euro must regain a foothold above $1.1885 to boost confidence that a low is in place.
PRC
Drivers: Chinese officials have signaled a tolerance for a stronger yuan by keeping its daily dollar fix falling on a trend basis. When the dollar fix is set higher, it is typically of a smaller magnitude than when it is set lower. The end game, or limit of the official tolerance for yuan appreciation is not known. We are beginning to suspect it might be near CNY6.80.
Data: China's lending figures are due, and there has been some concern that lending is slowing. A soft report may fan speculation of scope for easing monetary policy. This will likely be the same signal from the January CPI and PPI due February 11. Producer price deflation has persisted for more than three years. China's CPI fell on a year-over-year pace in six of the 12 months last year. However, the deflationary dalliance ended, and CPI finished 2025 at 0.8%, the highest since February 2023. Yet, that is still too close to deflation to draw much comfort. The policy rate (7-day repo rate) is nearly double it. Lastly, the latest efforts to support the housing market will not be reflected in January, expected in the coming days.
Prices: The dollar fell to a new low against the offshore yuan in the middle of last week slightly below CNH6.93. The weakness in the dollar ahead of the weekend saw it return to almost CNH6.93. The next interesting chart area is around CNH6.87.
Japan
Drivers: The market may have been hoodwinked. US and Japanese officials triggered a short squeeze of the yen by verbal intervention. The dollar arguably appeared it was gaining some momentum, and it was threatening JPY159. It fell to nearly JPY152. Not bad for not spending a single cent. However, the verbal intervention did not signal an underlying policy change. The market looks poised to test the resolve of officials. Japan votes this weekend. The market reaction may tun on whether the LDP secures an outright majority like some polls suggest is possible. Regardless, it seems likely that the LDP will maintain the current alliance.
Data: Japan reports December labor earnings on early Monday. They disappointed in November and illustrated another element that might contribute to the BOJ's cautiousness. Japan will also report December current account figures, which show a strong seasonal pattern for deterioration. However, a mitigating factor is that Japan's trade balance has been improving even though it still ran a deficit last year. There is a strong seasonal pattern toward better trade position in December.
Prices: The fear of material intervention faded as the election drew near. The dollar advanced last week. It closed the gap created by the lower opening on January 26 and exceeded the (61.8%) retracement of its losses from January 23 (Fed rate check reportedly on behalf of the US Treasury), seen near JPY156.50. The daily momentum indicators have turned higher, suggesting the risk is for additional near-term dollar gains. The next area of resistance may be near JPY157.50. A strong mandate for Prime Minister Takaichi could see the dollar rise more, but the market may turn cautious on approaching JPY159, without fundamental cover.
UK
Drivers: Corrective forces dominate sterling. In the seven-session tear last month, it rallied from about $1.3330 on January 19 to almost $1.3870 on January 27. The Warsh nomination seemed to have corresponded with the beginning of a technical correction lower. The Bank of England kept the policy rate steady at 3.75%. In the swaps market, the next cut is not priced in until early Q3. It had nearly been fully discounted by April as recently as mid-January.
Data: The UK reports December and Q4 GDP on February 12. After contracting by 0.1% in October, the UK economy grew 0.3% in November. It may have stalled in December. One cannot, though translate the monthly performance into the quarterly GDP estimate. Consider in Q3 the monthly figures were cumulative -0.1%, while the quarterly estimate was for 0.1%. With that in mind, the median forecast in Bloomberg's monthly survey is for the economy to have grown by 0.1% in Q4. The Office for Budget Responsibility is a little more optimistic than the Bank of England for growth this year (1.4% vs. 1.2%).
Prices: In nine sessions, sterling fell from nearly $1.3870 to about $1.3500 seen ahead of the weekend. It overshot the (61.8%) retracement of the dramatic rally from the January 19 low (~$1.3330) found near $1.3535. It recovered to almost $1.3615 in North America before the weekend. The daily momentum indicators have only recently turned lower and are far from oversold. Still, a sustained move above $1.3645 would likely see the technical tone stabilize, while a push above $1.3700-30 could signal the end of the downside correction.
Canada
Drivers: The greenback plummeted from about CAD1.3930 on January 16 to nearly CAD1.3480 on January 30. Momentum indicators were stretched. With the nomination of Warsh as the next Fed Chair, the US dollar is correcting higher. The move seems to have more room to run.
Data: Canada's economic diary is nearly empty in the coming days. That building permits are the highlight tell you something.
Prices: The US dollar posted an outside down day against the Canadian dollar ahead of the weekend, encouraged by the broader greenback retreat and the sharp drop in Canada's January unemployment rate (6.5% vs.6.8%). The unexpected decline in the participation rate (65.0 vs. 65.4%) helped drive the jobless rate. The greenback stalled a little above the (50%) retracement of the decline from the January 16 high (~CAD1.3930), found slightly north of CAD1.3700. It returned to CAD1.3625 before the weekend. Although the momentum indicators have turned higher, a break of CAD1.3575 warns of heightened risk of a return to the late January low near CAD1.3480.
Australia
Drivers: The Australian dollar's downside correction is a little different than the other major pairs because of last week's rate hike. In the anticipation of the hike, the Aussie reached nearly $0.7100 on January 29, it fell nearly two cents in the greenback's broad correction. It recovered to $0.7050 where it stalled. Corrective technical forces appear to remain intact, and the market already has a nearly 90% chance of a hike at the May meeting. The pendulum is unlikely to swing much harder in that direction.
Data: After last week's rate decision, December's household spending figures, due Tuesday, are unlikely to have much impact. Still, it is impressive that in November household spending had risen 6.3% year-over-year, matching the fastest pace since June 2023. The pace has accelerated. Consider that in the three months through November, housing spending rose by an average of 0.9% a month. That is nearly twice the average of the same period in 2024, which at 0.5% was robust. The Reserve Bank in Australia meets next on March 17.
Prices: The Australian dollar was initially sold to a nine-session low a little below $0.6900, ahead of the weekend, before recovering to new session highs in North America near $0.7015. It posted a bullish outside up day but closing above the previous session's high (~$0.7005). A move above $0.7020 could spur another run at the late January high slightly below $0.7100, a three-year high.
Mexico
Drivers: After it appreciated by a little more than 15.6% last year, the peso is off to a strong start this year. It is up another 4.0%, through last week. It is attractive on the broader assumption that the USMCA review will not be too disruptive, but those talks will not begin until around mid-year. President Sheinbaum is popular and arguably has done a solid job in dealing with the changes in Washington. At the same time, it would be negligent not to recognize that Latam currencies are the top four performing currencies among emerging market economies. The Mexican peso is second behind the Chilean peso (~4.9%). The combination of the relatively low implied volatility of the Mexican peso and attractive, even if not the highest, interest rates, coupled with nearly 24-hour a day liquidity, makes MXN a favorite long for carry trades. Moreover, despite the peso appreciation and US economic nationalism, Mexico's 2024 $18.5 bln trade deficit swung into surplus in 2025 (~$770 mln).
Data: Mexico's central bank left its overnight rate target unchanged at 7.0%. This week's CPI report will show price pressures remain elevated. Industrial output may have grown for the third consecutive month. The data then may boost confidence that the central bank has begun an extended pause.
Prices: The dollar posted a bearish outside down day against the Mexican peso ahead of the weekend. It traded on both sides of the previous day's range and settled below its low. Initially, it approached the week's high (~MXN17.5725) and posted its lowest close in three sessions. A retest on the late January lows (~MXN17.10-MXN17.13) looks likely, though the momentum indicators are over-extended but have turned higher.
Reviewed by Marc Chandler
on
February 07, 2026
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