• Heavy line-up of Fed speakers ahead. Markets will zero in on labor market remarks.

• US inflation and retail sales unlikely to curb Fed funds rate repricing.

• SCOTUS decision to steer tariff outlook.

You’re Invited
Webinar: Fault lines for 2026: Fed unity, uneven growth, and fiscal credibility Register Here
Join BBH’s Elias Haddad and Jorge Aseff, as they discuss the top market themes heading into 2026
30 Minutes, Thurs Jan 29th | 7:00 AM PDT | 10:00 AM EST | 15:00 GMT | 16:00 CET

USD rallied against most currencies last week, underpinned by an upward adjustment to US rate expectations. A run of Goldilocks-type US data - neither too hot nor too cold - has helped anchor rate expectations in favor of USD. December ISM readings were mixed, while soft nonfarm payroll gains were offset by a dip in the unemployment rate.

US Inflation Check and a Barrage of Fed Speakers

USD can extend recent gains as this week’s data is unlikely to curb Fed funds rate repricing. 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 has room to deliver the 50bps of cuts priced in by Fed funds futures in 2026.

US December CPI takes the spotlight on Tuesday. Headline inflation is expected at 2.7% y/y for a second consecutive month, and core inflation is seen rising 0.1pts to 2.7% y/y. The December CPI print should be treated with caution because the missing October price quotes and later-than-usual November price collection have distorted the data.

More importantly, upside risks to prices are fading and leaves scope for the Fed to ease policy. The ISM prices paid indexes point to moderating inflation pressures. Additionally, average hourly earnings growth (3.8% y/y) is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual nonfarm productivity growth of around 2%.

US November retail sales data is due on Wednesday. Consensus sees headline 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 0.4% 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.

There’s a heavy slate of Fed officials speaking this week on the US economic outlook and monetary policy. Markets will zero in on labor market remarks given conflicting signals from the December nonfarm payrolls report. In our view, the downside risks to employment continue to rise which underscores the need for additional Fed funds rate cuts. Excluding the non-cyclical health care and social assistance sector, private nonfarm payrolls fell -1.5k in December and are down on average -19.4k in the three months to December.

…And Justice for All

The US Supreme Court (SCOTUS) decision on President Donald Trump's use of emergency tariff powers could come Wednesday. Online betting markets give less than 30% chance the court will uphold 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

UK November GDP on Deck

UK real GDP is expected to recover 0.1% m/m after shrinking -0.1% in October (Thursday). Leading indicators point to soggy UK economic activity with real GDP growth on track to undershoot the Bank of England’s (BOE) Q4 projection of 0.3% q/q. As such, the BOE has room to ease policy further, which remains a drag for GBP. The UK swaps curve fully price-in a total of 50bps of BOE rate cuts to 3.25% over the next twelve months.

The move towards closer UK-EU trade ties is encouraging but likely to do little to offset the costs of Brexit on the UK economy. UK Prime Minister Keir Starmer plans to introduce his EU reset plan bill as soon as next month that includes facilitating agri-food trade and improving youth mobility. The UK Office of Budget Responsibility estimates Starmer’s reset to raise Britain’s GDP by 0.24% over the long term while Brexit shaved 4% to 5% off Britain’s GDP.

Election Fever Hits Japan

The Yomiuri newspaper reported on Friday, that Japanese Prime Minister Sanae Takaichi was considering holding a snap election on February 8 or 15. Takaichi does not need to call a general election until October 2028, but she may want to capitalize on her high approval rating (of nearly 70%) to regain her party’s (LDP) majority in the lower house. That has raised concern over a further loosening of Japan’s fiscal discipline as reflected by the underperformance in JPY and JGBs last week.

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%. 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.

Beyond the Majors

USD/PLN is up near a one month high around 3.6200. National Bank of Poland (NBP) is expected to keep the policy rate on hold at 4.00% (Wednesday). 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%.

USD/KRW is up near a two-week high around 1460.00 and should hold under its next major resistance near 1485.00. Bank of Korea (BOK) is widely expected to leave the policy rate unchanged at 2.50% for a fifth consecutive meeting (Thursday). BOK has not ruled out the possibility of additional rate cuts. But the swaps market anticipates the next move to be a hike. We agree. Real GDP growth and inflation are tracking above the BOK’s forecasts.