US
USD stalls after two days of gains. A run of Goldilocks-type US economic data – neither too hot nor too cold - continues to offer USD support. Still, relative monetary policy trend means the dollar index (DXY) will struggle to sustain a break above 100.00. Most other major central banks are done easing, while the Fed’s bias is tilted toward additional rate cuts.
November retail sales and PPI are due today (1:30pm London, 8:30am New York). Consensus sees nominal retail sales at 0.5% m/m vs. 0% in October due to a rebound in car sales. The retail sales control group used for GDP calculations is projected at 0.3% m/m vs. 0.8% in October. Overall, consumer spending remains resilient but rising job insecurity should lift precautionary savings and weigh on future consumption.
PPI will hold clues on CPI risks. Watch-out for Trade Services PPI which measures changes in margins received by wholesalers and retailers. In September, Trade Services PPI dropped to a 13-month low at 1.5% y/y vs. 2.9% in August, suggesting businesses are absorbing costs rather than passing them on to consumers. That reduces upside risk to inflation.
Yesterday, the December CPI underscored the Fed’s guidance that it can be patient before resume easing. Headline inflation matched consensus at 0.3% m/m and 2.7% y/y vs. 2.7% in November. Core inflation was marginally lower than expected but in line with the Cleveland Fed Nowcast model forecasts. Core CPI rose 0.2% m/m (consensus: 0.3%) and 2.6% y/y (consensus: 2.7%) vs. 2.6% in November while super core services (less housing) inflation remained at 2.7% y/y for a second consecutive month.
Progress towards the Fed’s 2% inflation goal is stalling. But upside risks to prices are fading, leaving room for the Fed to lower the funds rate toward more neutral levels around 3%. Fed funds futures price little chance of a cut at the next three FOMC meetings (January 28, March 18, and April 29). The next full 25bps cut isn’t priced until the June 17 meeting.
Fed speakers today include: Philadelphia Fed President Anna Paulson (FOMC voter), Fed Governor Stephen Miran, Minneapolis Fed President Neel Kashkari (FOMC voter), Atlanta Fed President Raphael Bostic (non-FOMC voter, and retires next month), and New York Fed President John Williams.
Crude oil prices have rebounded to a two-month high on concerns about a potential supply disruption if the US intervenes in Iran. President Donald Trump warned of “very strong action” if Iranian authorities go ahead with hanging some protesters.
A closure of the Strait of Hormuz by Iran, where nearly one-fifth of global oil shipments pass through, is the biggest upside risk to crude oil prices. However, investors should lean against overshoots in crude oil prices. First, Iran relies heavily on this passageway for its own exports. Closing it is unlikely as it would further cripple its own economy. Second, the US and allies maintain strong naval presence in the region. Blocking the strait could trigger more severe military repercussions against Iran.
The US Supreme Court (SCOTUS) decision on President Donald Trump's use of emergency tariff powers could come today. Online betting markets give less than 30% chance the court will rule in favor of the tariffs.
A ruling against Trump's emergency tariff powers could see a kneejerk upside reaction in risk assets as it would strip the administration of a key economic weapon. In parallel, USD could come under downside pressure while the Treasury yield curve would steepen further on heightened fiscal concerns. Over the next ten years, the tariffs to date are expected to raise about $2.7 trillion while the One Big Beautiful Bill Act will cost $3.4 trillion.
A ruling in favor of Trump's emergency tariff powers would likely be risk-negative and USD positive at the margin because it would re-empower tariffs as a credible, unilateral economic weapon.
A muddled ruling, where the court grants limited emergency tariff and require only limited repayment, is another scenario. This would raise policy uncertainty. But the broader market impact should be contained because the administration can pursue at least five other, albeit more cumbersome, alternative legal avenues that will keep most of the tariffs in place.
JAPAN
USD/JPY slipped under 159.00 after hitting 159.45 overnight, its highest level since July 2024. Japanese Finance Minister Satsuki Katayama issued a fresh warning against excessive yen moves. Katayama said “We won’t rule out any means and will respond appropriately to moves that are excessive, including those that are speculative…The kind of sudden moves we saw on Jan. 9 [following a newspaper report of a snap election] have nothing to do with fundamentals, and are deeply concerning.” Japan’s chief currency official Atsushi Mimura echoed Katayama’s comments.
Meanwhile, Japanese Prime Minister Sanae Takaichi is expected to dissolve the lower house of the legislature on January 23, paving the way for a snap election in February. Takaichi will give further details on Monday, according to Hirofumi Yoshimura, co-head of junior coalition partner Ishin.
POLAND
USD/PLN is consolidating near the lower end of its six-month 3.5700-3.7100 range. We expect that range to hold over. National Bank of Poland (NBP) is expected to keep the policy rate at 4.00% today. Just 3 of 32 Bloomberg-polled analysts have a cut penciled in, the rest expect no change.
NBP is in good position to pause and see how the economy responds to the 175bps of cuts delivered since May 2025 given that inflation is close to the bank’s 2.5% target. The swaps curve price in 50bps of cuts in the next six months and the policy rate to bottom at 3.50%.
CHINA
USD/CNH is holding just above this week’s new cyclical low around 6.9600. China’s December trade data is consistent with encouraging economic activity. The trade surplus totaled a record $1190bn in 2025. Both exports and imports overshot expectation in December at 6.6% y/y (consensus: 3.1%, prior: 5.9%) and 5.7% y/y (consensus: 0.9%, prior: 1.9%), respectively.
In our view, a continued appreciation in China’s currency could help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
