Weekly Currency Review and Economic Outlook

US Dollar Overview

Last week, the US dollar mainly consolidated against the G10 currencies. A combination of robust economic data and the market’s dismissal of recent attempts by the administration to influence Federal Reserve policy imparted a slightly firmer tone to the greenback. Despite subpoenas related to the Federal Reserve sparking initial market unrest, the independence of the Fed remains supported by bipartisan consensus, thus limiting any significant policy impact. Notably, the dollar gained strength before the weekend after President Trump downplayed the chances of National Economic Council Director Hassett succeeding Chair Powell.

Market expectations reflect the Federal Reserve maintaining a steady stance at the January 28 Federal Open Market Committee (FOMC) meeting, with Governor Miran likely the sole dissenter favoring policy tightening. The derivatives market prices nearly two interest rate cuts for the year, a shift from last December’s median forecast of just one cut.

The US Dollar Index’s correlation with two-year Treasury yields has weakened over the past two months, ranging between 0.38 and 0.40, near the lower bound observed over the last eight months.

Exchange Rate Developments

Japanese Yen

Japanese authorities escalated verbal interventions to stabilize the yen, which tempered its recent declines but failed to trigger a significant rebound. The yen ended the week almost unchanged after touching its lowest level since July 2024. These verbal interventions appear adequate to reduce the need for tangible market action, although the potential for reversal remains if Prime Minister Takaichi calls a snap election, as speculated for late next week.

The Bank of Japan (BOJ) is widely expected to maintain its current policy at its upcoming meeting, with markets pricing in a potential rate hike no earlier than July. Meanwhile, Norway’s central bank also meets next week, with the market anticipating a pause but holding a possibility of easing later in the year.

Eurozone

Tensions between the Trump administration and the Fed have arguably helped the euro find a bottom near $1.1600. The widening US two-year Treasury premium, now around 147 basis points, has pressured the euro, which recently flirted with its 200-day moving average at approximately $1.1590—a key technical level maintained since March.

Economic indicators scheduled this week include the eurozone’s November current account balance and Germany’s ZEW survey. The ECB projects a narrowing current account surplus over the next several years. The preliminary EU PMI data is due at the week’s end; however, the ISM indices seem to carry greater market influence.

Chinese Yuan

The People’s Bank of China (PBOC) continues facilitating a controlled appreciation of the yuan by easing the dollar’s reference rate. The midpoint exchange rate recently approached CNY7.00, a target discussed for several months, allowing the dollar to trade within a 2% band roughly between CNY6.86 and CNY7.14.

Despite December’s CPI rising to its highest level in nearly three years, the stronger yuan may permit accommodative monetary policy to support domestic growth. The Q4 GDP report, due early this week, will be closely monitored amid ongoing skepticism about some Chinese economic data, although trade and investment figures receive broader acceptance.

British Pound

Sterling’s sensitivity to global dollar movements has increased, with steep negative correlations against the Dollar Index reaching levels last seen in late October. UK macroeconomic reports this week—covering the labor market, inflation, and retail sales—are anticipated with subdued expectations due to prevailing market forecasts for the Bank of England to maintain its policy stance until mid-2026.

The Office for Budget Responsibility is set to release updated fiscal projections, including a forecasted narrowing of the fiscal deficit. The composite UK PMI data anticipates headline risks but may have limited impact on market positioning.

Canadian Dollar

The Canadian dollar showed minimal reaction to recent trade agreements with China, which include concessions on electric vehicles and canola tariffs. The US dollar’s rally against the Canadian dollar has stalled but remains intact, with prices primarily fluctuating within a narrow range.

The Bank of Canada’s next policy move remains uncertain amid high economic uncertainty. December inflation and November retail sales data are due next week. Inflation remains close to the 2% target, though core measures indicate some underlying firmness. Retail sales have shown softness, contributing to a cautious market outlook.

Australian Dollar

The Australian dollar began 2026 with relative strength, standing out as the only G10 currency appreciating against the US dollar so far this year. However, momentum indicators suggest that the recent rally might be losing steam.

Upcoming data includes December employment figures, which are expected to highlight a slowing job market and a modest rise in the unemployment rate. The preliminary January PMI will also be released, providing additional insight into economic momentum.

Mexican Peso

Latin American currencies, particularly the Mexican peso and Colombian peso, have outperformed amid higher interest rates and commodity exposure. The peso’s gains reflect carry trade flows and relative resilience amid shifting US policy.

Mexico will report November retail sales, the IGAE economic activity index (a monthly proxy for GDP), and January inflation data shortly. Recent data trends suggest a likely pause in policy easing by the central bank, with inflation within the target band but core inflation somewhat elevated.

Economic Data and Policy Calendar Highlights

– **United States:** November Personal Consumption Expenditures (PCE) deflator, household income, consumer spending data, and the January ISM survey.
– **Eurozone:** November current account, Germany’s ZEW survey, and January preliminary PMI.
– **China:** Q4 GDP, and December retail sales, industrial output, and investment figures.
– **Japan:** December Consumer Price Index (CPI), November industrial output, tertiary sector activity, and December trade balance.
– **United Kingdom:** Labor market data, November CPI, retail sales, and the Office for Budget Responsibility’s fiscal outlook.
– **Canada:** December CPI, November retail sales, and Bank of Canada’s Q4 economic outlook.
– **Australia:** December employment data and preliminary January PMI.
– **Mexico:** November retail sales, IGAE economic activity indicator, and January inflation figures.

Technical Synopsis

The US dollar appears to be undergoing a technical correction following last November’s decline from approximately 100.40 to a low near 97.75 at Christmas. Last week, the index slightly exceeded the 61.8% retracement level around 99.40. While momentum remains supportive, it is showing signs of exhaustion, implying possible near-term reversals.

The euro surpassed its own 61.8% retracement from November 21 lows near $1.1490 but encountered resistance close to its 200-day moving average. A firm break below $1.1590 could target $1.1520, whereas stabilization above $1.1650 would reinforce the euro’s technical position.

The yuan’s approach to CNY7.00 is expected to lead to consolidation, possibly enabling the dollar to recover modestly to the CNH6.98-6.99 range. The yen faces downside risks if an early election is confirmed, with key support levels near JPY157.40 and JPY157.00 critical to undercut to trigger further depreciation.

Sterling’s daily momentum shows a downtrend after a weaker performance in November GDP data, with immediate resistance around $1.3450 and support near $1.3365. The Canadian dollar’s consolidation below the 61.8% retracement of the US dollar gain suggests further upward pressure on the greenback may be imminent, targeting the CAD1.3945 resistance zone.

The Australian dollar’s advance stalled near the 61.8% retracement at around $0.6730, with a base forming near $0.6660. Breaching $0.6650 could renew downside momentum. In Mexico, the peso recently achieved levels not seen since July 2024, with technical support projected around MXN17.38 and MXN17.00, while resistance lies near MXN17.80-MXN17.85.

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This overview synthesizes key recent developments and upcoming market-moving events across major currencies, providing a detailed framework for anticipating currency trends and economic data impacts.