US
USD is mixed near this week’s highs. The run of Goldilocks-type US economic data – neither too hot nor too cold - continues to offer USD support. Consumer spending activity is holding up well. The policy-relevant retail sales control group matched consensus at 0.4% m/m in November and October growth was revised down -0.2pts to 0.6%. In parallel, the January Fed Beige Book highlighted that outlooks for future economic activity “were mildly optimistic” with most districts “expecting slight to modest growth in coming months.”
Still, we doubt the dollar index (DXY) will sustain a break above 100.00 in part because easing inflation pressures leave plenty of room for the Fed to deliver additional rate cuts. Trade Services PPI dropped to a 15-month low at 1.0% y/y vs. 1.3% in October, suggesting businesses are absorbing costs rather than passing them on to consumers. Indeed, the January Fed Beige Book noted that “firms expect some moderation in price growth.”
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, while a total of 50bps of cuts remains fully priced by year-end. For reference, the FOMC median rate forecast implies just one 25bps cut in 2026.
Second-tier US economic data is due today: January Empire manufacturing and Philadelphia Fed business outlook surveys, initial jobless claims for the week ending January 10, November import and export price indexes, and November TIC data.
Fed speakers include: Goolsbee, Bostic, Barr, Barkin, and Schmid. Recall, both Goolsbee and Schmid dissented at the December FOMC meeting in favor of keeping rate on hold.
Political pressure targeting the Fed is a structural drag for USD. Yesterday, Poland said it was closely watching for any market fallout from the US Department of Justice investigation into the Fed ahead of planned US dollar debt issuances later this year. Immediate market effects are negligible, but the signal is powerful and feeds into the gradual erosion of the dollar’s reserve-currency dominance. Policy predictability is key factor a country monitors when choosing a borrowing currency.
UK
UK economic growth overshot expectations in November. Real GDP rose 0.3% m/m (consensus: 0.1%) vs. -0.1% in October, driven by services and production. Services output increased 0.3% m/m vs. -0.3% in October while production output increased 1.1% m/m vs. 1.3% in October on a solid pick-up in manufacturing activity. The construction sector remains a drag on the economy falling -1.3% m/m following a decline of -1.2% in October.
Leading indicators point to soggy UK economic activity with real GDP growth tracking 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.
SOUTH KOREA
KRW continues to underperform, and USD/KRW is eyeing key resistance around 1485.00. Korean investors’ appetite for US securities (stocks and bond) has been an ongoing drag on KRW. On December 18, South Korea’s government announced several measures aimed at curbing KRW outflows. Authorities are now considering introducing new macro-prudential policies to stabilize the won.
Yesterday, Treasury Secretary Scott Bessent said the Korean won’s depreciation was “not in line” with the country’s “strong economic fundamentals.” We agree, USD/KRW overshoot looks stretched. KRW is significantly undervalued (10% undervalued based on deviation from real effective exchange rate trend), South Korea has a significant current account surplus (6% of GDP), and Bank of Korea is done easing. South Korea also has a large FX reserve war chess totaling nearly $430bn (22% of GDP) to defend the currency. For reference, daily spot KRW turnover averaged $43.6bn in April 2025.
Bank of Korea (BOK) delivered a hawkish hold today. BOK unanimously voted to keep the policy rate unchanged at 2.50% for a fifth consecutive meeting (widely expected) but scrapped reference for “potential rate cut.” BOK highlighted that domestic economic activity faces increased upside risk because of “the accelerating upward trend in the semiconductor sector and the stronger than expected growth in major economies.” The swaps market price in nearly 50bps of hikes in the next twelve months to 3.00%.
