Intro
As hinted in the last report, we expected a calm FX market. Nearly all price differences were below 1%, and there were no high-impact economic events. However, there are slight changes to our sentiment biases, and the new month is sure to bring new and interesting developments.
Still, it’s worth reading our overviews for each currency since there are considerable nuances.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (USD): Neutral
The Fed ended 2025 with the policy rate at 3.50%–3.75% after a cumulative 75 bps of cuts in 2025. Recent Fed commentary suggests any further cuts may come later this year rather than soon, as officials watch whether inflation continues to cool and whether labour-market softness deepens.
Even with that ‘wait-and-see’ tone, the bigger-picture USD backdrop is that the hiking cycle is long over and U.S. rate support is no longer widening. So, the dollar’s upside tends to rely more on risk-off demand than on yield.
The return distribution tool I have access to, using Financial Source, suggests that USD is often bullish in January. So, the neutral bias is fair after months of bearishness (although fewer jobs are expected in this week’s NFP report).
Key news to watch: Initial Jobless Claims on Wednesday; Nonfarm Payrolls and unemployment rate on Friday
Euro (EUR): Bullish
The ECB held policy steady at its latest meeting and upgraded growth forecasts (e.g., around 1.4% for 2025), signalling more confidence in a ‘grind higher outlook rather than a downturn.
With inflation close to target and the Fed already cutting, EUR retains a relative policy advantage versus USD, though global trade/tariff uncertainty still caps upside during risk-off waves.
British Pound (GBP): Neutral
The BoE’s official summary shows Bank Rate at 3.75%, with the next decision due 5 Feb 2026. UK inflation has cooled but remains above target (CPI 3.2% y/y in Nov 2025, down from 3.6% in Oct).
That mix (decelerating inflation + a central bank already cutting) reduces GBP’s rate support, and 2026 growth concerns are rising in forecasts, even if the BoE remains cautious about rushing further.
Japanese Yen (JPY): Neutral
The BoJ raised its policy rate to 0.75% in December and stressed that underlying inflation and wage pass-through remain supportive of further normalisation if its outlook materialises. This means Japan is no longer ‘ultra-dovish’ versus peers.
The key offset is that JPY can still be pressured in risk-on carry phases, but fundamentally, the shift toward higher Japanese rates reduces the structural headwind that dominated for years.
Australian dollar (AUD): Bearish
The RBA held the cash rate at 3.60% in December and explicitly flagged uncertainty about how much to read into the newly released monthly CPI series. So, policy is ‘on hold, data-dependent,’ not racing to cut.
With inflation having been sticky enough that major-bank economists are now debating whether 2026 will bring hikes rather than cuts, the AUD’s downside from policy expectations is more limited than it was in mid-2025. However, China/commodities remain the big swing factor.
New Zealand dollar (NZD): Bearish
The RBNZ cut the OCR to 2.25% (26 Nov 2025) to support confidence and guard against a slower-than-needed recovery, and its November MPS frames the economy as supported by low rates and export prices but with a labour market that is still weak.
Private-sector analysis of the MPS also points to a lower projected terminal rate (around ~2.2% in 2026), a clear dovish skew versus peers that are holding or hiking.
Canadian dollar (CAD): Neutral
The BoC held the overnight rate at 2.25% last month, reinforcing the idea that cuts may be slowing or pausing if inflation stays contained and activity proves resilient enough.
For CAD, this ‘pause potential’ can be supportive, but the currency is still dominated by oil and the broad risk tone. So, it often trades as a macro/commodity proxy rather than on Canada-only fundamentals.
Key news to watch: unemployment rate on Friday
Swiss Franc (CHF): Bullish
The SNB held at 0% (11 Dec) despite very low inflation, maintaining Switzerland’s ‘low inflation + safe haven’ appeal while keeping intervention tools available if CHF strength becomes disruptive.
Recent reporting shows the SNB sharply reduced FX purchases in Q3, even as the franc had a very strong 2025 versus USD. This suggests a ‘manage at the margins’ approach rather than a full-on fight against CHF strength.
