• USD: cyclically neutral, structurally bearish.

• Labor market pulse in the US, Canada, and NZ.

• ECB and BOE on hold. RBA set to hike.

USD index (DXY) has recovered back within its multi-month range after undershooting to a four-year low last week. Cyclically, we are neutral USD and expect DXY to hold within the range that’s been in place since June 2025 because the Fed is in no rush to resume easing and the risk is the Fed cuts less than is currently priced in (50bps by year-end).

Structurally, we are bearish USD because of fading confidence in US trade and security policy, politicization of the Fed, and worsening US fiscal credibility. We unpack the US fiscal fault line in our latest quarterly report (here). The risk is the structural drags on USD outweigh the neutral cyclical USD backdrop and pull USD lower and further away from rate differentials, like it did in Q2 last year.

US Jobs in Focus

The FOMC softened its easing bias last week after scrapping previous reference about rising downside risks to employment. Instead, the FOMC noted that “Job gains have remained low, and the unemployment rate has shown some signs of stabilization.” We get plenty of jobs clues this week as JOLTS, ADP, ISM, Revelio Labs lead to the policy-relevant NFP.

US January nonfarm payrolls (NFP) data is due Friday. Consensus is looking for +68k job gains vs. +50k in December. The significance lies less in the headline job gains, and more in the sector generating them. In December, most of the job gains came from the non-cyclical health care and social assistance sector, a pattern that has historically signaled an impending labor market slowdown. Excluding the non-cyclical health care and social assistance sector, nonfarm payrolls were up just 11.5k in December.

The unemployment rate is seen unchanged at 4.4% in January, in line with the FOMC 2026 median projection. However, the sharp drop in the Conference Board labor differential index (jobs plentiful minus jobs hard to get) in January to the lowest since February 2021, is indicative of a rising unemployment rate.

ADP January private payrolls data is on Wednesday and Revelio Labs non-farm employment is on Thursday. Consensus expects ADP private payrolls at +45k vs. +41k in December. There is no consensus estimate for Revelio Labs employment, but in December it showed the US economy added 71.1k jobs. According to Revelio Labs, its employment data has a 0.74 correlation coefficient with the NFP survey.

December JOLTS report is due Tuesday. In November, the JOLTS report was mixed. Both the hiring and opening rates dipped, adding to signs of weakening labor demand. But the quits rate ticked up, and the layoffs rate ticked down, suggesting workers are more confident in finding another job while firms are holding on to workers.

January Manufacturing ISM is on Monday, and the Services ISM is on Wednesday. The contraction is manufacturing activity is projected to slow (48.5 vs. 47.9 in December) and services sector growth momentum is expected to moderate (53.5 vs. 53.8 in December). Importantly, a further decline in the Prices Paid sub-index and improvement in the Employment sub-index would validate Fed Chair Jay Powell’s comment that tension between employment and inflation has diminished, leaving Fed policy in a good place.

Canada Jobs in Focus

Canada January labor force survey is due Friday. The economy is expected to add 5k jobs vs. 10.1k in December and the unemployment rate is seen unchanged at 6.8%. Leading indicators point to a soft labor market. Job vacancies have fallen to their lowest level since October 2017, the share of businesses reporting labor shortages remains low, hiring intentions are still weak, and the share of firms planning to lay off staff in the next twelve months rose to its highest level since Q2 2016.

The Bank of Canada (BOC) is in good position to keep the policy rate on hold at 2.25% for some time. The swaps curve currently price in 30% odds (down from a high of nearly 70% in mid-January) of a 25bps rate increase to 2.50% over the next twelve months. We see room for the market to further push-out expectations for a BOC rate hike which is a headwind for CAD. BOC Governor Tiff Macklem speaks on Thursday.

NZ Jobs in Focus

New Zealand Q4 labor market data is Tuesday. Employment is expected at 0.3% q/q (RBNZ forecast: 0.2%) vs. 0% in Q3, the unemployment rate is seen unchanged at 5.3% (RBNZ forecast: 5.3%), and private regular wages are anticipated at 0.5% q/q (RBNZ forecast: 0.5%) for a second straight quarter.

The swaps market implies a first full 25bps hike in September, followed by another 25bps hike in December to 2.75%. The risk is the RBNZ delivers less rate increases than is currently priced in which is a headwind for NZD. There’s still significant spare capacity in the New Zealand economy, with the output gap projected to average -1.1% of potential GDP over 2026 vs. -1.6% in 2025.

RBA to Hike

Reserve Bank of Australia (RBA) policy decision and Statement on Monetary Policy are due Monday. The RBA is expected to raise the cash rate 25bps to 3.85% (66% priced-in). We anticipate the RBA to deliver a hike, which can push AUD/USD back above 0.7000 briefly. Australia trimmed mean CPI inflation is above the RBA’s December projection and 2% to 3% target range, while the unemployment rate dropped sharply in December below the RBA’s 4.4% forecast.

ECB On Hold

European Central Bank (ECB) policy decision is on Thursday. The ECB is widely expected to leave the policy rate unchanged at 2.00% for a fifth consecutive meeting. Eurozone inflation is stabilizing around the bank’s 2% target (January CPI is due Wednesday) and leading economic indicators point to an encouraging growth outlook.

The risk is the ECB stresses that a further appreciation of the euro is a downside risks to growth and inflation. ECB scenario analysis shows that a 4.3% rise in EUR/USD to 1.2100 would shave -0.1pts off its 2026 baseline growth and inflation forecasts. We expect EUR/USD to trade closer to 1.1600 in the near term.

BOE On Hold

Bank of England (BOE) policy decision and Monetary Policy Report are due Thursday. The BOE is widely expected to keep rates on hold at 3.75% after voting 5-4 to cut rates by 25bps at the December 18 meeting. The BOE is poised to reiterate its cautious easing guidance that “Bank Rate is likely to continue on a gradual downward path” but “judgements around further policy easing will become a closer call.”

Persistently above target UK inflation suggests the BOE can afford to wait before resuming easing to support weakening labor market conditions. The swaps curve price-in the next full 25bps cut in June and 76% odds the BOE delivers a total of 50bps of easing to 3.25% over the next twelve months. We expect GBP/USD to stabilize closer to 1.3500.

Japan Election: The Road to 233

Japan's Prime Minister Sanae Takaichi has called a snap lower house election on February 8 to capitalize on her high approval ratings (above 60%). At the time the lower house was dissolved on January 23, Takaichi’s Liberal Democratic Party (LDP) held 196 seats and Ishin no Kai 34, for a coalition total of 230. This was just 3 seats shy of the majority threshold of 233 in the 465-seat chamber.

Takaichi has vowed to resign as prime minister if its LDP-led ruling coalition fails to secure a majority in the House of Representatives. A Nikkei survey (conducted on January 27-28) indicated that Takaichi’s coalition was projected to win 233 or more of the 465 seats. 233 seats are enough to secure a simple majority, 244 seats are required for a stable majority, 261 for an absolute stable majority, and 310 for a supermajority.

Takaichi’s expansive fiscal agenda is an ongoing drag for JPY and Japanese government bonds. But in our view, worries over Japan fiscal profligacy are overdone. Japan nominal GDP growth is running at around 4% and leading indicators point to an encouraging growth outlook, while 10-year government bond yields are closer to 2.2. With growth comfortably exceeding borrowing costs, Japan can sustain primary budget deficits without putting its debt ratio on an upward trajectory. In this environment, fiscal sustainability is far less fragile than markets currently imply.

Other Central Bank Watch

National Bank of Poland (NBP) policy decision is Wednesday. NBP is expected to leave the policy rate at 4.00% for a second straight meeting. However, it’s a close call as 11 of the 25 analysts polled by Bloomberg see a 25bps rate cut to 3.75%. We think NBP is in good position to pause and see how the economy responds to the 175bps of cuts delivered since May 2025. Inflation is close to the bank’s 2.5% target and 2025 real GDP growth was 3.6%, exceeding the bank’s 3.4% projection. The swaps curve price in a total of 50bps of cuts in the next six months and the policy rate to bottom at 3.50%.

Mexico’s central bank (Banxico) policy decision is Thursday. Banxico is widely expected keep rates on hold at 7.00% after delivering 300bps of easing last year. Banxico can afford to pause easing as the real policy rate (3.37%) is now within bank’s neutral range estimate [1.8% to 3.6%, with a midpoint of 2.7%]. The swaps curve price in just one 25bps cut over the next twelve months and the policy rate to bottom at 6.75%.

Czech National Bank (CNB) policy decision is Thursday. CNB is widely expected to keep the policy rate at 3.50% for a sixth consecutive meeting after lowering them to that level in May 2025. The risk is CNB shifts from a neutral to dovish bias. CNB Deputy Governor Jan Frait said recently “rates may stay broadly stable this year or dip by at most 50 basis points” because of external forces. The swaps market is pricing in 50bps of total easing over the next 12 months that would see the policy rate bottom near 3.00%.

The Reserve Bank of India (RBI) policy decision is Friday. RBI is expected to keep the policy rate unchanged at 5.25% after delivering a 25bps cut in December. RBI may prefer to stand pat to cushion INR depreciation. USD/INR rallied to a record high around 92.00, and INR is underperforming across the board since the start of the year.

However, the risk is RBI cuts rates again this week. India core inflation is close to the lower end of the bank’s 2% to 6% target range and fiscal policy is modestly restrictive. The government is targeting a slightly smaller budget deficit of 4.3% of GDP for fiscal 2027, compared with a 4.4% target for fiscal 2026. The swaps curve price one final 25bps of cuts in the next three months and rates to bottom at 5.00%.