USD: Kevin Warsh nominated: Hawkish résumé, dovish optics
Kevin Warsh’s selection to succeed Jerome Powell sets up a credible-but-flexible policy mix: a former Fed governor known for hawkish instincts and skepticism of QE, yet lately arguing the central bank needs “regime change” and a lower‑rate bias. His 2009 speeches and commentary stressed the need to normalize policy pre‑emptively—even with unemployment near 10%—cementing his inflation‑first reputation. At the same time, he has recently emphasized restoring credibility and protecting independence while being open to easing—alongside a smaller balance sheet. As for the often‑quoted line that the Fed had become a “slave to the S&P,” should be treated as reported characterization rather than a direct quote from Warsh. Markets, for their part, seem to be penciling a policy rate around ~3% over the coming year—more consistent with survey‑based expectations than with any explicit Warsh target.
The immediate reaction fits the script. The dollar initially firmed on the perceived credibility of an experienced insider but then pared gains, while Treasuries delivered a classic steepener: front‑end yields dipped as investors leaned into earlier cuts, and long‑end yields rose on higher term premium and inflation‑credibility uncertainties. On the day, the 2‑year yield edged lower and the 30‑year rose, underscoring that split; the 10‑year nudged higher as well. In short, markets are tentatively pricing Warsh as pragmatic—easier near term, but with a watchful eye on independence and balance‑sheet policy that keeps the greenback supported, yet capped, and the back end demanding a premium.
In macro news, U.S. producer price inflation came in far hotter than expected in December, underscoring renewed upside pressure on prices. Headline PPI rose 0.5% month-on-month, more than double the 0.2% consensus forecast, while core PPI delivered an even bigger surprise, surging 0.7% on the month. This pushed the annual core PPI rate up to 3.3%, well above expectations of 2.9%, highlighting persistent underlying inflation momentum in the production pipeline.
EUR: Pullback extends as risk off bites
Amid the latest bout of global turbulence, the euro has emerged as one of the key pressure points — buoyed by US dollar scepticism but still sensitive to risk swings.
While traders have added to expectations of ECB easing this year — pushing short‑dated German yields further below their US counterparts — that didn’t stop EUR/USD from climbing to fresh four-year peaks above $1.20 this week. Why? Because investors have been turning away from the dollar amid policy uncertainty and rotating into liquid alternatives such as the euro and gold.
That said, yesterday’s price action was a reminder not to write off the dollar’s safe‑haven role when global risk aversion bites. EUR/USD has now pulled back around 1.4% from its four‑year high. For euro bulls, the silver lining is that the 14‑day Relative Strength Index has slipped out of overbought territory, suggesting this may be a healthy correction rather than a trend break.
On the macro side, the European Commission’s economic sentiment indicator improved in January, pointing to a firmer start to the year. Confidence rose across most sectors, with manufacturing continuing its gradual recovery as production expectations moved above their long‑term average despite soft export demand. Inflation expectations eased but remain elevated. There’s little urgency for the ECB to act, though the dollar’s recent weakness will be watched closely by the more dovish voices on the Governing Council.
CAD: 15-month low
The USD/CAD is currently testing a critical 15-month support floor at 1.35, well in oversold territory after plunging below its 200-day SMA. While the aggressive downward slope of the shorter-term averages confirms strong selling pressure, the current move may be overstretched and ripe for a technical bounce or consolidation. Essentially, the pair is at a “make-or-break” junction: a clean break below 1.35 would signal further liquidations toward 1.34300, while a hold here, could spark a relief rally back toward the 1.365 resistance zone. A stronger US Dollar this morning is helping the CAD to consolidate above 1.35.
Trade: Navigating trade volatility and US tensions
The November 2025 trade data offers a stark illustration of the volatility currently gripping the Canadian economy, with the merchandise trade deficit widening sharply to $2.2 billion. This deterioration was driven by significant setbacks in key sectors: gold exports plunged following a massive prior surge, and automotive exports hit a three-year low due to ongoing production snags and new US tariffs. While the energy sector provided a crucial buffer with an 8.5% rebound in export volumes, the overall picture reveals an economy struggling to find consistent momentum. This lumpiness in trade flows directly mirrors the broader economic instability highlighted by the Bank of Canada, where quarterly growth patterns have become increasingly erratic, largely driven by these massive swings in trade and inventory management.
Beneath these headline numbers lies a deeper structural shift in Canada’s relationship with its largest trading partner. The November data showed imports from the US falling to their lowest levels since early 2022, while imports from non-US markets hit an all-time high. This aligns perfectly with the Bank of Canada’s January report, which notes that businesses are actively “reconfiguring their trade” to reduce reliance on the US amid heightened tariff risks. Canadian firms are increasingly diversifying their supply chains and decoupling from integrated North American networks, a costly but necessary “structural adjustment” that is reshaping the economy in real-time.
This friction is weighing heavily on Canada’s growth prospects. The Bank of Canada projects that GDP growth will remain modest at just 1.1% for 2026, restrained by these very trade disruptions and slower population growth. The continued uncertainty surrounding US trade policy is dampening business investment and productivity, effectively lowering the economy’s “speed limit,” or potential output. As a result, the softness seen in the November trade figures is not just a monthly blip but a symptom of a broader cooling, where domestic demand is tepid and the labor market remains soft with elevated unemployment.
Despite these headwinds, this cooling effect has created a unique equilibrium for inflation. The Bank of Canada observes that while trade barriers and supply chain shuffles are pushing costs up, the weak demand in the economy—”excess supply”—is pulling prices down, keeping inflation balanced near the 2% target. Essentially, the economic slack caused by sluggish trade is canceling out the inflationary sting of tariffs. However, the outlook remains fragile; with the CUSMA review looming later in 2026, the Bank warns that the “future of trade in North America” remains the single largest uncertainty clouding the path forward.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: January 26-30
All times are in EST
Have a question? [email protected]
*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.
