The dollar had a terrible week against just about every major currency worldwide, despite President Trump’s latest U-turn and predictable backing down over his Greenland tariffs.
Initial relief in financial markets did not extend to the US dollar. Renewed threats of tariffs and the political use of the courts to force rates down mean that US policy uncertainty and institutional degradation will remain in the front burner for international investors, and hedging currency risk by selling dollars is increasingly the path of least resistance. Japanese threats of intervention to support the yen (with US support) added chaos to the mix, resulting in the dollar's worst week in months.
This week's Federal Reserve meeting is shaping up as a critical event. While there is little doubt about the outcome (no change), expectations have been building that rhetoric will be hawkish due to strong economic data and a response to Trump's assaults on Fed autonomy. It's important to note that while the dollar continues to fall, the Sell America trade is no longer in play. The latest shooting in Minnesota may also impact markets, as it increases the risk of another Federal shutdown when the current funding agreement expires this Friday.
GBP
Last week's deluge of UK macroeconomic data did little to clarify the Bank of England's rate path. The jobs market continues to soften at a steady pace. The unemployment rate remains stuck at a decade high outside of the pandemic, while payrolled employment sank by an alarming 43k in December, which is also the largest drop outside of covid since the data set began in 2014. Inflation remains stubbornly high and above 3%, albeit this was driven by temporary factors, while retail sales were surprisingly strong in December.
There are few data releases or Bank of England communications on the docket this week, so we expect the pound to track the euro almost tick for tick. Investors will have one eye on the next MPC rate announcement (05/02), but with no real expectations for another cut for at least the next two or three meetings, this announcement is unlikely to rock the boat to any significant extent.
EUR
The PMIs of business activity for January were a slight disappointment. While they validated the narrative of a rebound in the German economy powered by the huge fiscal stimulus package of early 2025, a loss of momentum in the French economy more than made up for it and the headline number actually dropped modestly. One positive factor is the sustained appreciation of the Chinese yuan, which will offer some relief to European industry competing against Chinese goods in international markets.
We still expect that the path of least resistance for the common currency will remain upwards against the dollar, as international investors continue to hedge their exposure to US assets by selling dollars. It remains the case that European assets continue to offer a safe and liquid alternative to the greenback for investors seeking predictability and stability in government decision making, which should favour the euro so long as Trump remains in the White House.
USD
Economic data out of the US remains fairly positive, even building on the strong base of 4.4% third quarter growth. Weekly jobless claims continue to bump around near all time lows, suggesting that lower levels of job creation are not feeding through to a higher unemployment rate. However, all of this seems outweighed by international concern about policy chaos and institutional degradation, and the US dollar is now the worst performing G10 currency year to date - even worse than the yen.
Attention this week will, of course, focus on the Fed's January meeting on Wednesday. There will be no change in rates and some hawkish noises from Powell would probably support the dollar, which may have fallen too much, too fast, at least for the short term. We expect Powell to emphasise that the US economy remains in a decent place, while indicating to markets that the FOMC is in no rush to cut rates again. Indeed, futures markets are now not fully pricing in the next rate reduction until as far out as the bank’s July meeting.
Deep dives and expert insights:
- G10 Weekly FX Update
- G3 Update: Trump U-turns on tariffs
- 2026 Global Market Outlook
- FX Talk: 2026 Market Outlook
