Back on the Ropes

January 06, 2026

Elias Haddad

USD on the back foot. No policy-relevant economic data releases today.

Mixed ISM manufacturing to keep Fed dovish.

Germany December CPI previews Eurozone inflation tomorrow. France December CPI matched consensus.

USD failed to hold yesterday’s gains and is back near the middle of the range in place since June 2025. There is no policy-relevant economic data due today, so markets should be quiet. If you missed it, our Venezuela take is detailed in Sunday’s weekly strategy report (here).

The ISM manufacturing index for December was mixed and supports a dovish Fed bias. The headline index unexpectedly slipped to a 14-month low at 47.9 (consensus: 48.4) vs. 48.2 in November, indicating a deeper contraction in manufacturing activity. However, the new orders-to-inventories ratio recovered above 1, suggesting firms may need to ramp up production as demand exceeds supply. Meanwhile, the employment sub-index inched up but remains firmly in contraction territory and the prices paid sub-index was unchanged, signaling fading upside risk to inflation.

Fed speakers today include: Richmond Fed President Tom Barkin (non-voter) and Fed Governor Stephen Miran. Yesterday, Minneapolis Fed President Neel Kashkari (2026 voter) pointed out he thinks policy is “pretty close to neutral right now” but cautioned “there’s a risk that the unemployment rate could pop from here.” Philadelphia Fed President Anna Paulson (2026 voter) concluded in a note published Saturday that “some modest further adjustments to the funds rate would likely be appropriate later in the year.”

Overall, it won’t take much to convince a majority of FOMC members to deliver the 50bps of cuts priced-in by Fed funds futures in 2026. The minutes of the December 9-10 FOMC meeting stressed that “Most participants judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation declined over time as expected.”

In our view, 2026 will be a year of rising fiscal stress where foreign exchange increasingly focus on fiscal credibility alongside rate differentials. That should keep USD trading on the defensive. We will unpack that theme later this month in our quarterly report and webinar.

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