USD: Policy fears overpower fundamentals
Renewed US dollar weakness is being fuelled by growing signs that Japanese and US authorities could coordinate to support the yen, a development that would naturally imply a softer USD. Traders have taken last week’s rate check as evidence that Washington is at least comfortable with — and perhaps even quietly supportive of — a weaker dollar, accelerating Monday’s sell-off. The weakness is no longer confined to the euro complex; it’s spilling across Asia and the G10, with GBP, AUD and NZD also strengthening as investors rotate out of the US currency.
A rate check is when officials call major banks to ask where the currency is trading and how the market is behaving. It’s a way for authorities to flag discomfort with rapid currency moves before taking action — and while Japan uses this tool frequently, US participation raises the stakes. The most credible read is that policymakers are worried yen weakness helped amplify last week’s turbulence in Japanese bonds, pushing global yields higher and tightening financial conditions in the process.
A far less likely — but far more significant — outcome would be a coordinated, Plaza‑style push to drive the yen higher over time. The first scenario implies short‑term market smoothing; the second would signal a fundamental shift in how major economies approach exchange‑rate management and could unleash a much more volatile phase for global FX.
Because we’re seeing an increase in implied volatility as a result, yen carry trades — borrowing in cheap yen to buy higher‑yielding dollars — are losing appeal. Higher swings mean poorer risk‑adjusted returns, making the trade far less attractive. That said, we haven’t seen any meaningful signs of carry trades unwinding yet. That’s important: if carry positions do start to unwind, it opens up another channel for short‑term volatility, as investors exit high‑yielding FX trades simultaneously, which could cause far more disorderly market moves globally.
All of this is happening at a moment when the fundamentals actually favour USD demand. Last year showed clearly that the dollar can detach from traditional drivers whenever policy risks take centre stage, and we’re seeing that tension again now. US economic surprises are outperforming most peers, and the spread between two‑year Treasuries and G7 equivalents has widened sharply over the past week — yet the dollar is weakening across the board. It’s a pattern that echoes the dynamics seen during the April tariff scare.
Still, these dollar‑supportive fundamentals may help contain further downside from here, especially as we head into Wednesday’s Federal Reserve decision. Like markets, we’re not expecting a rate cut, but the key question is how long this pause will last — and whether policymakers present a united front behind Chair Jerome Powell.
EUR: Euro gains dollar drives
EUR/USD extended its grind higher, briefly tagging $1.19 before slipping back to $1.1880 at the close. The pair now sits less than 50 pips off the 2025 high at $1.1919 from last September. Back then, the rally was powered by a clear dovish shift from the Fed that fundamentally justified euro strength. This time, the move looks almost entirely driven by softer USD sentiment, raising doubts about how durable these levels really are. Our medium-term view is unchanged. We expect 1.18 to reassert itself as a firm ceiling once the latest bout of USD softness fades and fundamentals, which still favour the dollar, re-gain control.
At home, Germany’s Ifo business climate index – released yesterday – added little support. The headline was unchanged at 87.6 in January, below expectations of 88.2. Sentiment has been depressed for years, with the index stuck below its long-term average of roughly 90 since early 2022. The latest reading reinforces the view that any meaningful lift in activity will come only once defence and infrastructure spending plans finally translate into real outlays later in the year, a process slowed by Germany’s sluggish federal decision-making. In fact, the clear fracture between above‑ versus below‑average trends in the expectations and current business climate components respectively says a lot about the slow actualisation of those spending promises. Regardless, at this stage, the euro macro offers limited independent direction for FX given its minimal influence on the ECB policy outlook. EUR/USD remains a USD‑driven story.
GBP: Trading near 4-month high
GBP/USD is trading around the $1.37 handle, its strongest level since mid‑September, with broad‑based dollar weakness doing most of the heavy lifting. A range of currencies are marking multi‑week and even multi‑year highs against the dollar to start the week. Heightened US policy uncertainty under the Trump administration — spanning foreign policy, trade tensions, and questions around the Fed’s independence — has already been weighing on the dollar, and last week’s rate check only adds another layer to that pressure.
GBP/USD is trading comfortably above all the key daily and weekly moving averages, signalling potential for more upside, however a note of caution is an overheated daily Relative Strength Index, which suggests the move may be running a little hot in the very short term.
GBP/EUR has also been performing well, extending a six‑week run of gains and holding near the €1.15 level after trading below €1.13 just a couple of months ago. Technically, the pair has rebuilt momentum, reclaiming its short‑term moving averages — the 9, 21, 50 and 100‑day measures — which reinforces the improving tone.
The challenge remains the 200‑day exponential moving average around €1.1556, a level that has repeatedly capped rallies since early January. A decisive break above this barrier would open the door to a more durable upside extension, while continued failures here risk another spell of consolidation.
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Calendar: January 26-30
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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.
