USD: A jobless expansion?
Volatility is picking up this morning. Worries about the Fed’s independence is heating up again, especially with Powell calling out the administration’s recent attempts to influence policy. The US Dollar is weaker as markets assess the renewed tension between the administration and the Federal Reserve.
On the macro front, the US economy is currently navigating a jobless boom, where top-line growth remains resilient even as the labor market hits a functional wall. The December payroll report confirmed this divergence with a meager addition of only 50,000 jobs, cementing 2025 as the weakest year for job creation since 2003, excluding the pandemic era. For the full year, payrolls grew by a mere 584,000, a drastic cooling compared to the robust expansion of the previous decade. When factoring in cumulative downward revisions of 76,000, the three-month moving average has slipped into a contraction of 22,000, signaling that while there is no “cliff-edge” collapse, the momentum of the American workforce is at a virtual standstill.
This selective freeze is characterized by a stark divergence between industries, creating a bifurcated labor market that favors defensive sectors. Hiring is now almost entirely concentrated in healthcare and hospitality, while cyclical industries like manufacturing, construction, and retail are actively shedding positions. In December, healthcare remained the primary engine of growth by adding 21,000 roles, but even this reliable sector has seen its pace decelerate compared to previous years. With job openings falling to a more than one-year low of 7.15 million, we have entered a “low-hire, low-fire” environment where companies are increasingly hesitant to expand headcounts despite a resilient 4.4% unemployment rate.
The Federal Reserve’s path remains complicated by sticky wage growth, which rose 3.8% annually in December and continues to preserve worker purchasing power. While officials have not formally ended the easing cycle, the Fed’s latest projections signal only a single quarter-point rate cut for the entirety of 2026. Markets have adjusted by pricing in a prolonged hold, with no further easing expected until mid-year. This creates a delicate balancing act for the economy as it attempts to sustain momentum while the traditional engines of job creation remain stalled and the Fed waits for more definitive evidence of economic deterioration before acting.
Parallel to this labor shift, the US Dollar has entered 2026 with remarkable strength, largely due to the recent US military intervention in Venezuela. This move has fundamentally altered energy market expectations, with the US signaling a multi-billion dollar commitment to rehabilitate Venezuelan oil infrastructure.
The USD DXY Index remains firmly entrenched in the trading channel it initiated in May of last year. The geopolitical pivot, reinforced by expectations of fiscal expansion and tax stimulus, has injected a surge of liquidity that provides a formidable floor for the currency, effectively allowing the greenback to defy the typical downward gravity of a Fed easing cycle.
The trajectory for 2026 will likely be defined by whether this currency channel breaks or leads to a full-scale dollar recovery as the conversation regarding the “neutral rate” shifts upward toward 3%. A critical turning point arrives in May, when Jerome Powell’s term expires, raising immediate questions about the Fed’s independence and the policy lean of his successor. As the market weighs these leadership changes against the shifting fundamentals of a higher-for-longer interest rate environment, all eyes turn to next week’s key data releases. On the macro front, focus remains squarely on Tuesday’s CPI report, where the 2025 yearly reading is expected to hit 2.7%, providing a final look at the inflationary backdrop that will guide the Fed’s first major decisions of the year. On the trade front, the Supreme Court is set to decide the fate of the IEEPA tariffs; however, the administration has already signaled it is prepared to pivot to alternative executive tools, including Section 232 and Section 301 authorities, to ensure its trade policy remains intact regardless of the judicial outcome.
GBP: Sterling’s external sensitivity has shifted meaningfully
Sterling has opened the week on firmer footing against the US dollar, as the probe into Fed Chair Jerome Powell revives concerns that Trump’s push for much lower interest rates could erode the central bank’s credibility. That backdrop gives the de‑dollarization narrative fresh momentum. GBP/USD has climbed back into the mid‑$1.34s after bouncing cleanly off its 200‑day moving‑average support in the upper echelons of $1.33, reinforcing the idea that the broader uptrend remains intact for now.
Monthly UK GDP data lands on Thursday, giving markets a domestic focal point, but the real test comes the following week with labour‑market, inflation and PMI releases. Together, these will offer the first meaningful read‑across for the Bank of England’s February meeting and help determine whether policymakers feel compelled to deliver another 25-basis point rate cut. Markets are currently pricing fewer than two cuts for 2026, a stance that looks overly cautious given the likely path of disinflation and the UK’s lacklustre growth backdrop. A dovish repricing of BoE expectations would leave sterling vulnerable again via the yield channel.
For the consensus to shift decisively in favour of the pound, investors will need clear evidence of improving UK growth and stickier‑than‑expected inflation — without that combination, sterling’s upside case remains hard to sustain from a purely domestic driving standpoint.
That said, sterling’s external sensitivity has shifted meaningfully: as the chart below shows, GBP has become far more responsive to USD weakness over the past six months — more so than any other G10 currency. A 1% drop in the US dollar index now translates into nearly a 1% rise in GBP/USD, up from 0.55%. That shift shows how heavily the pound is trading off the broader dollar cycle.
CAD: Stabilized stagnation
The reconciliation of the December jobs report with October’s trade and GDP data reveals an economy defined by a divergent and hollow stability. While the headline employment figure remained flat, the jump in the unemployment rate to 6.8% suggests that the labour force is expanding faster than a trade-dented economy can absorb new workers. This “fragile equilibrium” is a direct result of a structural shift: Canada is shedding high-value, trade-exposed manufacturing roles due to U.S. tariff pressures and replacing them with service-oriented positions in healthcare and social assistance. Consequently, the economy is staying afloat not through industrial strength, but through a defensive expansion of the services and public sectors.
This shift has created a significant productivity gap that explains why employment can grow while the overall economy contracts. October’s 0.3% GDP decline and the widening $583 million trade deficit highlight a manufacturing sector in retreat, with wood product and machinery industries reeling from external shocks. When employment holds steady despite falling output, it indicates that the jobs being created are inherently less productive than the export-driven roles being lost. This “labor hoarding” or transition into lower-output service roles means that while more Canadians are technically “at work,” the collective economic value they produce is shrinking, leading to the anemic 0.5% annualized growth forecasted for the final quarter of 2025.
The Bank of Canada’s December decision to hold interest rates at 2.25% reflects this precarious middle ground. The Bank is caught between a soft labour market that needs support and the “cost-push” inflationary pressures created by new trade barriers and supply chain restructuring. Because the current economic slowdown is structural—caused by a permanent shift in North American trade relations—monetary policy has limited power to restore lost growth. The Bank’s cautious stance signals an acknowledgement that the era of easy, trade-led expansion is over, and the economy must now undergo a painful “reset” toward domestic resilience and government-supported infrastructure.
Ultimately, the verdict on the Canadian economy is that it has successfully avoided a “hard landing” but has entered a “low-growth trap.” The record-breaking performance of gold exports and the resilience of household spending act as thin veneers masking a 2.5% decline in non-gold exports and a persistent slump in business investment. For 2026, the outlook remains a “slow grind,” where any meaningful recovery is tethered to the renegotiation of trade agreements and the hope that recent investments in high-tech machinery will eventually translate into a more efficient, less vulnerable productive capacity.
USD Trade: An anomaly that’s likely to reverse
The dramatic narrowing of the U.S. trade deficit to $29.4 billion in October 2025—a 39% decrease from September—provides a substantial tailwind for fourth-quarter GDP growth. In national accounting, a shrinking trade deficit acts as a direct mathematical addition to GDP, as lower imports and higher exports indicate that a greater share of domestic demand is being met by U.S. production. The real goods deficit, which is adjusted for inflation and more closely tracked for GDP purposes, fell by a significant 19.8% in October. However, the overall boost to growth may be partially tempered by a corresponding drawdown in business inventories; the massive $14.3 billion drop in pharmaceutical imports suggests that companies are likely fulfilling domestic demand by depleting stockpiles they had accumulated earlier in the year, a move that subtracts from the inventory component of the GDP formula.
This reading aligns closely with the stated goals of the U.S. administration to aggressively narrow the trade gap through a robust tariff strategy. The sharp contraction in the goods deficit was largely driven by a $14.0 billion decline in consumer goods imports, which includes the significant pull-back in pharmaceutical preparations. The deficit with Ireland, a major pharmaceutical manufacturing hub, plummeted by $15.1 billion in a single month, signaling a potential shift in supply chain sourcing or a direct response to new trade barriers. While high-tech capital goods imports like computer accessories and telecommunications equipment continued to rise to support the domestic AI build-out, the broad-based decline in foreign consumer goods suggests that the administration’s tariff posture is successfully curbing the influx of overseas merchandise.
Despite the historic headline figures, the October data is heavily influenced by non-recurring one-time factors rather than a permanent structural shift in trade. Nearly 90% of the export growth was driven by a $6.8 billion surge in nonmonetary gold, a volatile category that the Bureau of Economic Analysis typically adjusts or excludes when calculating core economic growth. Analysts suggest this “gold rush” was a technical reversal of previous months where investors imported gold as a hedge against tariff uncertainty; once that uncertainty cleared, the metal was shipped back to international vaults in the UK and Switzerland. Furthermore, the record drop in pharmaceutical imports represents a “post-hoarding” slump, as firms had previously “front-loaded” shipments to beat the October trade policy deadlines. Consequently, while the deficit hit its lowest level since 2009, the magnitude of this improvement is likely an anomaly that will partially reverse in the coming months.
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Calendar: January 12-16
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
