US
USD is holding on to most of this week’s losses. Yesterday’s US data underpins the Fed’s wait-and-see approach and limits USD downside in the near-term. The updated Q3 GDP estimate was revised up 0.1pts to 4.4% and the Atlanta Fed GDPNow model points to 5.4% growth in Q4. Moreover, weekly jobless claims continue to suggest there’s no layoff spiral underway, real consumer spending held up in November, and the November PCE confirmed that inflation is stalling above the Fed’s 2% target.
The US S&P Global January PMI is up next (2:45pm London, 9:45am New York). The composite PMI is expected at 53.0 vs. 52.7 in December, indicative of a resilient growth outlook. In December, the PMIs showed a narrowing in the US growth edge over peers. If this trend persists, USD can continue to trade on the defensive within its trading range in place since June 2025.
JAPAN
JPY swing dominated market action today. JPY dropped against most major currencies following the Bank of Japan (BOJ) policy decision as concerns over Japan’s fiscal outlook outweighed the BOJ’s hawkish bias. USD/JPY then plunged briefly by over 1% to lows near 157.37 after BOJ Governor Ueda cautioned about excessive market volatility, sparking speculation that officials may be on the verge of intervening. USD/JPY has since recovered back above 158.00.
The BOJ kept the policy rate at 0.75% (widely expected) in a 8-1 majority vote. Staunch hawk Takata Hajime favored a 25bps hike to 1.00%. Unsurprisingly, the BOJ reiterated its tightening bias noting that “given that real interest rates are at significantly low levels…[the Bank] will continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
The BOJ gave mixed signals about the scope of the normalization cycle. On the hawkish front, the BOJ raised its 2026 real GDP growth and CPI inflation forecasts implying more hikes are in the pipeline. On the dovish front, BOJ Governor Ueda stressed he does not expect a big shift in the neutral rate estimate (between 1% and 2.5%), suggesting low confidence in removing policy accommodation. Ueda added that the BOJ may conduct operations “nimbly in exceptional cases,” to smooth volatility in the bond market. That’s in line with existing BOJ policy.
In our view, worries over Japan fiscal profligacy are overdone given that growth comfortably exceeds borrowing costs. Japan nominal GDP growth is running at around 4% and leading indicators point to an encouraging growth outlook. Japan’s composite PMI rose 1.7pts to 52.8 in January, the highest since August 2024 driven by solid expansions in services and manufacturing activity. Bottom line: we are sticking to our long-held view that JPY undershoot looks very stretched.
EUROZONE
EUR/USD retraced some of yesterday’s gains and is trading around 1.1734. The Eurozone PMI data underwhelmed in January but continues to point at a favourable growth outlook. The composite PMI was unchanged at 51.5 in January (consensus: 51.9). The details show the contraction in manufacturing eased in January (attributable to German and French industry) while service sector growth momentum slowed (attributable to a sharp contraction in services activity in France).
Bottom line: the ECB is in a good place to keep rates on hold for some time. The swaps curve price-in steady ECB rates at 2.00% over the next twelve months. We see limited room for an upward adjustment to ECB rate expectations, implying that EUR/USD will struggle to sustain a break above 1.1800.
UK
GBP is outperforming on surprisingly good UK economic data. UK retail sales unexpectedly increased in December. Total retail sales volumes rose 0.4% m/m (consensus: 0%) vs. -0.1% in November driven by online food stores. In parallel, the UK composite PMI surged in January to a 21-month high at 53.9 (consensus: 51.5) vs. 51.4 in December driven by solid expansions in services and manufacturing activity.
Bottom line: the Bank of England can afford to wait before resuming easing. The swaps curve continues to price-in the next full 25bps cut to 3.50% for June. GBP/USD faces important resistance at 1.3600.
NEW ZEALAND
NZD/USD rallied briefly to a four-month high around 0.5928 following New Zealand’s Q4 CPI report before paring back some of its gains. New Zealand Q4 CPI ran a little hot, reinforcing the case for RBNZ rate hikes later this year. Headline CPI rose 0.6% m/m (consensus: 0.5%, RBNZ projection: 0.2%) vs. 1.0% in Q3 to be up 3.1% y/y (consensus: 3.0%, RBNZ projection: 2.7%) vs. 3.0% in Q3. Underlying inflation also picked up, with the RBNZ sectoral factor model up 2.8% y/y vs. 2.7% in Q3.
Interestingly, RBNZ Governor Anna Breman did not push back on rate hike expectations like she did in December. Back then Breman stressed that “if economic conditions evolve as expected the OCR is likely to remain at its current level of 2.25% for some time.” Today, Breman did not comment on market pricing and instead noted that “some of that data shows a little bit of a stronger economic recovery, but the picture is still mixed.”
The swaps market implies a first 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.
