FX markets have been buzzing with activity over the past few weeks, driven by three key themes that are shaping global currency dynamics. These themes are:
Global Growth Optimism: Investors are embracing a positive outlook for the global economy in 2026, anticipating modest and synchronized growth. This sentiment has sparked interest in commodities and emerging market currencies. Buy-side surveys reveal surprising optimism among investors, who are putting their money to work, leading to record low cash levels. The Australian dollar has emerged as a top performer in the G10 currencies, while metals-driven Latin American currencies are leading the charge in the emerging markets space.
Dollar Debasement Trade: Fears of a compromised Federal Reserve persist, fueling gains in the precious metals complex. This theme is powering the gold and silver rally. The National Bank of Poland's recent decision to increase its gold holdings by 150 tonnes, moving away from fiat currencies, is a notable example. The gold rally is also strengthening currencies like the South African rand and the Swiss franc.
Weak Fiscal Positions Exposed: The sell-off in Japanese government bonds (JGBs) has brought attention to currencies with weak fiscal positions. As Francesco Pesole highlighted, this theme affects the dollar, the pound, and the yen. The dollar, in particular, seems to be on the losing end of these three themes.
But here's where it gets controversial: Will these themes continue to dominate, potentially leading to a decline in the dollar from the second quarter onwards? Or could better US consumption and activity data delay Fed rate cuts and provide a short-term boost to the dollar against low-yielding G10 currencies? It's a delicate balance, and we need to stay agile.
For today, we're watching S&P PMIs for the US and final January consumer confidence data. We anticipate the DXY holding support at 98.20/25, but a break could challenge the December lows at 97.75.
In the EUR space, the focus is on whether Europe can repeat the strong performance seen in early 2025. Events this week have emphasized the need for Europe to take control of its destiny. Last year, US Defense Secretary Pete Hegseth's comments on NATO drove Europe towards increased defense spending and German fiscal stimulus. Eurozone 10-year swap rates jumped significantly, pushing EUR/USD higher. While similar moves are less likely this time around, this theme will provide support to the euro during dips.
Today, we're looking at eurozone PMIs, which are expected to tick higher. A reading above 50 for the eurozone manufacturing PMI could give EUR/USD another boost. Intra-day resistance is at 1.1770/1780, and a break above 1.1810 might prompt a reassessment of our neutral EUR/USD view for this quarter.
In the JPY space, the Bank of Japan's slightly hawkish stance today might have sent USD/JPY lower under different circumstances. Growth and inflation forecasts were revised upward, and the BoJ expressed concerns about potential labor shortages and their impact on wages. However, the political and fiscal narrative in Japan is taking center stage. If PM Sanae Takaichi secures an LDP majority in the February 8th elections, JGB yields could rise, putting pressure on the yen due to fiscal concerns.
We maintain a slightly bullish USD/JPY bias leading up to the election event risk, especially if US activity data continues to perform well.
Moving to the CEE region, positive global news and a risk-on mood are outweighing the dovish pricing in the region. Polish data surprised on the upside yesterday, with industrial production growing significantly stronger than expected and wage growth jumping to 8.6%. This effectively removes the possibility of a rate cut by the National Bank of Poland in February, but a cut in March is still our baseline expectation. Wage growth is a sensitive topic for the central bank, and they will likely wait for the January figures to determine if the jump is a one-off or a new trend.
Today, the regional calendar is relatively muted, but the global story and risk-on sentiment continue to drive CEE currencies. The combination of positive US trade headlines and renewed hopes for a peace deal between Ukraine and Russia has supported unexpected gains across the region.
The main focus should be on EUR/HUF, which is surprisingly testing new lows in the context of central banks approaching rate cuts. A stronger CEE FX environment could encourage central banks in the region to go ahead with rate cuts. For now, it's best to go with the flow of good news, but we maintain our view that rate cut pricing will push CZK and HUF, in particular, to weaker levels. Therefore, the current rally could be an opportune entry point before the Czech National Bank and the National Bank of Hungary implement rate cuts in the coming months.
What are your thoughts on these themes and their potential impact on global FX markets? Feel free to share your insights and opinions in the comments below!
