Intro
Last week was the first to bring the markets back to normal in 2026 after a slow December. CAD, CHF, and EUR were among the biggest losers, while the pound, Australian dollar, and US dollar (which we hinted could be bullish this month) were the opposite.
As it was last week, there are barely any high-impact news events. So, we can focus on the underlying sentiment. There are some notable changes with currencies like USD, and CAD. I’ve said before that I have access to several proprietary tools through Financial Source, one of which is a return distribution tool that shows, historically, whether a currency is bullish, bearish, or neutral for each month. USD and CAD are standing out as some of their fundamentals have slowly aligned with their historical performance.
Nonetheless, read up on the other currencies and find some correlations where you can to stay on the most favourable side.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (USD): Bullish
The recent jobs numbers (unemployment rate and NFP) were less-than-stellar. Also, recent baseline interest rate forecasts still lean toward modest additional easing later in 2026 rather than renewed tightening.
The key support is that markets see only a low probability of a January cut, so the USD can catch short-term bids when ‘pause’ expectations firm up. My bias is bullish, mainly due to last week’s and historical performance (although it may change to neutral soon).
Key news to watch: Inflation Rate YoY on Tuesday; Initial Jobless Claims on Thursday
Euro (EUR): Neutral
The ECB held rates on 18 Dec 2025, keeping the deposit facility at 2.00% (refi 2.15%, marginal 2.40%), signalling comfort with policy as inflation runs near target and risks are watched. With the Fed already in an easing phase while the ECB sits tighter/steadier, EUR tends to find a floor on dips, though it can still be jolted by global risk sentiment and trade headlines.
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 reiterated that it will continue to raise rates if its outlook is realised. This is an ongoing shift toward normalisation that’s structurally supportive for JPY through tighter Japan–U.S. spreads.
The offset is that Japan’s policy debate remains politically sensitive, and bond yields have been rising amid fiscal concerns, which can keep the JPY choppy and prone to sudden swings even when fundamentals improve.
Australian dollar (AUD): Bearish
The RBA held at 3.60% in December and kept policy firmly data-dependent. Recent inflation remains above target, and markets are debating whether the next move later in 2026 could be a hike (not a cut) if disinflation stalls. That steadier/hawkish-leaning rates backdrop supports AUD on dips, but the currency remains heavily leveraged to global risk and China/commodities.
New Zealand dollar (NZD): Bearish
The RBNZ cut the OCR to 2.25% in late November and stressed that future moves depend on the outlook, while low rates are supporting activity in its MPS notes. The labour market remains weak (even if stabilising). This keeps NZD’s rate support relatively soft versus peers holding or tightening, meaning rallies tend to struggle unless global risk appetite is strongly positive.
Canadian dollar (CAD): Bearish
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.
Swiss Franc (CHF): Neutral
The SNB held the policy rate at 0% (Dec 11) and reiterated that it will be active in FX markets if needed. Minutes and follow-up reporting reinforce the base case of rates staying on hold with inflation expected to rise gradually within the 0–2% range.
That combination (very low inflation plus safe-haven demand) keeps the franc structurally supported, with the main caveat being SNB smoothing, which can cause short-lived pullbacks.
