US Dollar Starts 2026 on Stronger Footing Amid Market Expectations

After trending downward from late November through late December, the US dollar has begun 2026 with renewed strength. This rebound is supported by data reinforcing the market’s belief that the Federal Reserve will maintain an extended pause in interest rate adjustments, likely continuing into the second quarter, mirroring last year’s pattern.

Geopolitical Developments and Market Responses

Despite widespread attention to geopolitical events, including US actions in Venezuela and threats related to Greenland, these factors have exerted minimal direct influence on financial markets. Notably, February WTI crude oil prices climbed approximately 3.7% last week — marking the most significant weekly advance since October — extending gains for a third consecutive week. This consecutive upward streak matches the longest run since June-July 2024.

Meanwhile, the US Supreme Court has yet to issue a ruling on the president’s authority to impose broad emergency tariff powers, and unresolved Congressional funding risks a federal government shutdown at month-end.

Upcoming US Economic Data

Key data slated for release in the week ahead includes the December Consumer Price Index (CPI), November Producer Price Index (PPI), industrial production, and retail sales. Price pressures are expected to remain firm, with economic activity likely showing sequential improvement. These figures will serve to affirm market expectations of a Federal Reserve pause similar to the previous year’s approach, tempering interest in the forthcoming Beige Book.

European Monetary Union: Euro’s Consolidation Amid Mixed Signals

The euro stabilized near $1.18 in late December following stalled improvements in Purchasing Managers’ Indices. Despite a surge in German factory orders and industrial production for November, the eurozone’s overall manufacturing growth appears to be plateauing. Aggregate trade and industrial production data due shortly are unlikely to significantly influence the euro’s trajectory.

Currency movements over the past month indicate a stronger inverse correlation of the euro with US Treasury yields compared to German yields. The euro recently dipped below $1.1620, approaching a technically significant retracement level near $1.1610. Momentum indicators suggest the downward correction could persist, with the 200-day moving average around $1.1575 providing a key support threshold.

China: Trade Surplus Maintains Seasonal Strength

China is engineering a gradual appreciation of the yuan primarily through subtle downward adjustments to the dollar reference rate. Recent government interventions aim to steer the USD/CNY fix towards levels near 7.0, allowing the dollar to decline towards 6.86 within permitted bands.

December trade data, to be reported imminently, is expected to reveal a widening surplus consistent with strong seasonal trends observed over the past eight years. Year-to-date figures show robust export growth outpacing imports, supporting ongoing surplus expansion.

Japan: Mixed Data Amid Political Uncertainty

The dollar-yen exchange rate’s sensitivity to US and Japanese 10-year Treasury yields has fluctuated significantly, with recent correlations modestly above year-low levels. Reports suggest Prime Minister Takaichi may call a snap election at the start of the parliamentary session, potentially influenced by strained relations with China.

Japan will publish its November current account surplus on January 13, which traditionally narrows in November but has occasionally widened recently. Notably, Japan runs a persistent trade deficit despite a current account surplus. December Producer Price Index data will follow, with prices rising faster than consumer inflation and contributing to market speculation of potential interest rate hikes, although current odds for tightening remain moderate.

Technically, the dollar’s advance above JPY158 after recent US employment data challenges previous highs, attracting options expiration interest near JPY158. The momentum favors further dollar strength, although government verbal interventions and restrained market conditions suggest limited scope for aggressive intervention.

United Kingdom: Economic Data and Sterling’s Decline

Sterling’s recent movements are more closely linked to shifts in the Dollar Index than to the euro, showing a relatively higher correlation with US Treasury yields compared to UK rates. November GDP data, to be released shortly, may indicate the first monthly expansion since June, though the UK’s industrial sector remains weak amid ongoing political pressures.

Sterling has endured a four-day downtrend, slipping below key technical supports including the 200-day moving average. Momentum indicators point to further downside potential, with retracement targets near $1.3365 and $1.3300, complementing an anticipated bearish crossover of moving averages early in the week.

Canada: Loonie Faces Early-Year Weakness

The Canadian dollar started 2026 as the weakest G10 currency, declining approximately 1.25% year-to-date. Challenges stem partly from US control over Venezuelan oil assets, which may pressurize Canadian heavy crude markets. Following a strong rally in late 2025, the loonie appears subject to corrective pressures.

USD/CAD movements show higher sensitivity to Canadian two-year yields than to US equivalents, and display a notable inverse correlation with US equity market performance, highlighting risk sentiment influences.

Upcoming Canadian data includes November building permits, December housing starts, and existing home sales, which historically exert limited impact on the currency. Portfolio flow reports indicate a slowdown in capital inflows concurrent with a deteriorating trade deficit, though foreign demand improved in the latter half of last year.

Technically, the USD/CAD pair is extending its upward correction, surpassing key retracement targets and eyeing recent highs near 1.4015, supported by constructive momentum indicators.

Australia: Household Spending Bolsters the Aussie

The Australian dollar exhibits moderate correlation with the Dollar Index and stronger links to domestic two-year yields than US yields. Its price movements also show notable association with precious and base metals, particularly gold.

Robust household spending, with a 1.3% monthly gain in October—the strongest in nearly a year—and elevated consumer inflation expectations in Melbourne underpin speculation of Reserve Bank of Australia rate hikes later in the first half of 2026.

After approaching a peak near $0.6765, the Australian dollar reversed and settled near the 20-day moving average. Further retracement could target $0.6635 and $0.6600, with recent price action indicating a critical support zone near $0.6660.

Mexico: Peso Supported by Yield and Stability

The Mexican peso’s recent strength appears related to relatively high yields and low volatility compared to other currencies. Its exchange rate shows modest inverse correlation with US two-year yields but aligns positively with movements in other funding currencies like the yen and Swiss franc.

Mexico will publish December nominal wage figures and October private consumption data, with wages expected to rise by a significant margin this year. Consumption rebounded in the latter half of 2025 after early-year weakness.

The dollar made a marginal new four-week high against the peso before stabilizing just under MXN18.00. Momentum indicators suggest some near-term upward potential toward MXN18.09, while a break above MXN18.14-15 may be necessary to drive further corrective moves in peso positioning.

Summary

As 2026 begins, the US dollar is recovering ground lost in late 2025, supported by expectations for a sustained Fed pause. Global currencies face a range of influences including central bank policies, geopolitical uncertainties, and mixed economic data. Technical indicators across multiple currency pairs suggest ongoing adjustments, with risk sentiment and yield dynamics continuing to shape the foreign exchange landscape in the near term.