US
USD recovers back within its multi-month range. US equity futures point to a lower open after yesterday’s late session rebound. 10-year Treasury yields are closing in on last week’s high near 4.30%. Gold prices are down over 10% after hitting a fresh high yesterday. We expect USD 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.
President Donald Trump is expected to nominate Kevin Warsh as the next Fed chair today. If nominated and confirmed by the Senate, he would replace Jay Powell when his term ends in late May. During his time as Fed governor from 2006 to 2011, Warsh was wary of prolonged easy policy and large-scale asset purchases.
More recently, in a November 16, 2025, commentary titled “The Federal Reserve’s Broken Leadership” Warsh argued that “The Fed's bloated balance sheet…can be reduced significantly. That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.” If Warsh’s Fed policy vision is implemented, the US yield curve could steepen further as short rates fall, while longer-term rates may stay sticky or even drift higher due to lack of US fiscal credibility.
Fed speakers today: Fed Governor Stephen Miran, St. Louis Fed President Alberto Musalem (non-FOMC voter), and Fed Vice Chair for Supervision Michelle Bowman.
US December PPI is the data highlight (1:30pm London, 8:30am New York). Watch-out for Trade Services PPI which measures changes in margins received by wholesalers and retailers. In November, 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, underscoring fading upside risk to inflation.
EUROZONE
EUR/USD is trading heavy near 1.1900. Eurozone Q4 real GDP growth overshot expectations. Real GDP rose 0.3% q/q (consensus and ECB projection: 0.2%) vs. 0.3% in Q3. More importantly, leading indicators (IFO, PMI) continue to point to a favourable Eurozone growth outlook.
The ECB is in a good place to keep rates on hold for some time. The swaps curve price-in steady rates at 2.00% over the next twelve months and that’s unlikely to change much in the near term. As such, EUR/USD should trade closer to 1.1600.
JAPAN
USD/JPY is up near 154.00 from a low of roughly 152.00 this week. The Tokyo January CPI print points to easing inflation pressures nationwide. Headline fell 0.2pts more than expected to 1.5% y/y (lowest since March 2022) vs. 2.0% in December, driven by subsidies for utilities and a tax cut. Core ex-fresh food & energy unexpectedly dipped to a ten-month low at 2.4% y/y (consensus: 2.6%) vs. 2.6% in December.
The Bank of Japan can afford to be patient before resume raising rates. The swaps market trimmed odds of a March rate hike to 13% from 20% earlier this week and implies just over 60% probability of an April rate increase. Our base case is for the BOJ to deliver another hike at the April 28 meeting - after the Shunto spring wage negotiations, which typically wrap up by mid-March.
We see room for USD/JPY to edge down towards 140.00 by year-end, the level implied by US-Japan rate differentials. First, worries over Japan fiscal profligacy are overdone given that growth comfortably exceeds borrowing costs. Second, Japan’s mix of loose fiscal policy and tighter monetary policy is JPY positive.
