US
USD is up against most major currencies, with the dollar index (DXY) closing in on its next resistance level at the 200-day moving average. A break above would add upside momentum. However, relative monetary policy indicates that technical-driven rallies in USD should be brief and shallow. Yesterday’s data supports Fed funds futures pricing 50bps of cuts in 2026:
ADP private payrolls growth underwhelmed in December. ADP employment printed at +41k (consensus: +50k) vs. -32k in November driven in large part by gains in the non-cyclical education and health services (+39k). When the non-cyclical sector dominates job creation, it has historically signaled an impending labor market slowdown. Indeed, the November JOLTS report added to signs of weakening labor demand. Both the hiring and opening rates dipped to last year’s low.
The December ISM services index remained indicative of solid services sector activity, but price pressures eased further. The headline index overshot expectation at 54.4 (consensus: 52.2) vs. 52.6 in November and sub-indexes were good. New Orders surged to 57.9 (consensus: 52.6, prior: 52.9), highest level since September 2022, Employment is back into expansion territory for the first time since May 2025, and Prices Paid dropped to a nine-month low at 64.3 vs. 65.4 in November.
An AI-driven productivity boom is the biggest upside risk for USD as it would allow the Fed to keep policy restrictive for longer. Faster productivity raises potential growth rate, supporting stronger economic activity without triggering inflation. US Q3 non-farm productivity data is due today (1:30pm London, 8:30am New York). Productivity (GDP/hours worked) is expected at 5.0% SAAR vs. 3.3% in Q2, which would be well above the post-war annual average of 2.1%.
Still, we think it’s too soon for AI-driven productivity gains to be evident. Although AI adoption has surged since 2023, overall penetration remains low, suggesting that productivity gains will take time to diffuse across the broader economy. Historically, it took decades – often 20 to 50 years – for general purpose technology (steam power, electricity, combustion engine, information & communication) to fully realize their transformative potential.
Other noteworthy data in the pipeline today include: December Challenger job cuts, initial jobless claims for the week ending January 3, October trade balance, and December New York Fed survey of consumer expectations.
JAPAN
USD/JPY is directionless near this week’s high. Japan November labor cash earnings growth was soft. Cash earnings printed at 0.5% y/y (consensus: 2.3%) vs. 2.5% in October due to a 17% plunge in seasonal bonuses and survey-related distortions. The less volatile scheduled pay growth for full-time workers unexpectedly eased to 2.0% y/y (consensus: 2.4%) vs. 2.1% in October.
Nevertheless, leading indicators suggest the feedback loop between higher wages and inflation is still in play, underscoring the Bank of Japan’s hawkish bias. Consumer confidence in income growth improved in December to the highest level since March 2024 while the Q4 Tankan business survey showed labor shortages are exceptionally widespread and persistent. Bottom line: we continue to expect USD/JPY to converge with US-Japan rate differentials and trade closer to 140.00 in the next few months.
SWEDEN
USD/SEK is firmer near 9.2200 after testing a multi-year low of 9.1400 in late December. Sweden inflation unexpectedly cooled in December, curtailing market bets of a Riksbank rate hike in the next twelve months. CPIF was 2.1% y/y (consensus: 2.3% and Riksbank forecast: 2.6%) vs. 2.3% in November while CPIF ex-energy was 2.3% y/y (consensus and Riksbank forecast: 2.6%) vs. 2.4% in November. Still, the Riksbank signaled it’s done easing and that should be enough to limit SEK undershoots.
SWITZERLAND
USD/CHF is up near the middle of its multi-month 0.7900-0.8100 range. We expect this range to hold. Swiss inflation matched expectations in December. Headline CPI was 0.1% y/y vs. 0.0% in November and core CPI printed at 0.5% y/y (consensus: 0.4%) vs. 0.4% in November. Bottom line: the Swiss National Bank will keep the policy rate steady for the foreseeable futures. The swaps curve price-in the policy rate to remain around 0.00% over the next twelve months.
EUROZONE
EUR/USD is trading heavy near 1.1670. The ECB’s November CPI consumer survey of expectations reinforces the case that the ECB is in a good place to keep rates on hold at 2.00%. 1-, 3-, and 5-years inflation expectations were unchanged at 2.8%, 2.5%, and 2.2%, respectively, and consistent with inflation stabilizing at the ECB’s 2% medium-term target. Bottom line: we expect EUR/USD to hold above 1.1500 over the next few months.
PERU
Peru’s central bank (BCRP) is expected to keep rates on hold at 4.25% (11:00pm London, 6:00pm New York). Only one of the nine analysts polled by Bloomberg see a cut. In our view, BCRP is well placed to stand pat because the current interest rate level is close to neutral. Bottom line: Peru’s positive real interest rates, favorable balance of payments backdrop, and firm copper prices bode well for PEN.
