USD: US retail sales disappoint
The US retail sales saw an unexpected stagnation in December, as consumer spending momentum hit a wall to conclude the holiday season. According to Commerce Department data released today, retail sales were flat (0.0%), significantly missing the consensus estimate of a 0.4% gain. This follows a robust 0.6% increase in November, suggesting that the initial holiday burst may have exhausted household budgets earlier than anticipated. Most concerning for economists was the “control group” sales, a key metric that excludes volatile categories and feeds directly into GDP calculations, which dipped 0.1%, defying expectations for a steady rise.
The weakness was widespread, with 8 out of 13 retail categories reporting declines. Clothing stores, furniture outlets, and auto dealers led the retreat, while gains were concentrated in building materials and sporting goods. The data highlights a growing “income bifurcation” in the US economy: while stock-market gains have bolstered the wealth of higher-income households, lower-income Americans are increasingly constrained by the persistent high cost of living and more moderate wage growth. While some look to upcoming tax refunds to provide a floor for demand, the lackluster December finish suggests a more cautious consumer heading into the first quarter of 2026.
This cooling trend has quickly translated to the bond market, where Treasury futures jumped and yields slid across the curve as traders began pricing in a more aggressive easing path from the Fed, now eyeing about 58 basis points in cuts by year-end. The US Dollar is also feeling the heat, starting the week on the defensive as it grapples with “de-dollarization” headlines, specifically reports that China is nudging its banks to trim their Treasury holdings, and a post-election slide in USD/JPY that’s making it tough for the greenback to find its footing.
CAD: Downward move amid high volatility
The USD/CAD has had significant two-way volatility over the last quarter. After peaking near a multi-month high of 1.411 in early November, the pair descended to a late-January trough of approximately 1.348 before staging a modest recovery toward the 1.36–1.37 zone.
To start this week, price action has slipped back below the 1.36 handle as markets rapidly recalibrate in response to shifting narratives, moving from pure headline risk back toward underlying fundamentals. The USD/CAD bearish outlook is technically reinforced by the alignment of moving averages; shorter-term averages remain stacked beneath longer-term ones, suggesting that any attempted rallies will likely collide with heavy resistance near the 1.37 and 1.38 levels. A softening Greenback is defining the start of the week, fueled by anticipation of cooling US labor data, even as the market remains wary of a firm CPI print that could complicate the Federal Reserve’s policy trajectory. Further weighing on the US Dollar, Treasuries extended their slide following reports that Chinese regulators are advising financial institutions to trim their US bond holdings to mitigate exposure to market volatility.
This downward pressure is corroborated by the options market, where risk reversals are currently pinned near the bottom of their six-month range. This positioning indicates that market participants are actively paying a premium to hedge against further USD depreciation rather than positioning for a meaningful rebound. Coupled with elevated At-The-Money (ATM) volatility across shorter tenors, the data points toward a period of sustained turbulence and price instability. Ultimately, these indicators reflect a cautious market braced for continued pressure and erratic swings for the pair in the near term.
EUR: Euro supported by diversification flows
After bouncing off its 21‑day moving average last week, EUR/USD posted its second‑strongest daily gain since September on Monday, breaking through the $1.19 handle — a level it has only traded above for seven days since 2022. The pair is being buoyed by firmer global risk sentiment, a steeper US yield curve, and an extended rebound in silver.
With metals‑FX correlations running unusually high, the backdrop continues to favour a grind higher in the near term, even if stretched long positioning remains a headwind. Volatile swings in precious metals are still spilling into EUR/USD, but the correlation has flipped direction of late: silver surged 7% yesterday and the euro firmed alongside it. The 30‑day EUR/USD–silver correlation now sits in the 75th percentile of the past five years — a reminder that metals sentiment is exerting an unusually strong pull on the pair, whether the impulse is risk‑on or risk‑off.
The underlying story is the broader diversification‑away‑from‑USD theme. When precious metals attract flows as alternative stores of value, EUR/USD tends to benefit in parallel — and that linkage has only strengthened as the dollar faces a growing list of domestic and external headwinds.
However, stretched long positioning remains the main obstacle to a sustained EUR/USD push higher. Friday’s CFTC data showed leverage‑fund net longs edging back toward cyclical extremes, which might keep a lid on upside traction in the near term.
MXN: Banxico pause anchors Peso
Mexico’s January 2026 Consumer Price Index (CPI) signaled a renewed firming in price pressures. Headline inflation rose to 3.79% year over year, up from 3.69% in December, though slightly below market expectations of around 3.8–3.83%. According to INEGI, monthly inflation printed at 0.38%, reflecting a combination of unfavorable seasonal dynamics and the annual adjustment of excise taxes (IEPS) on products such as tobacco and sugar‑sweetened beverages, which took effect at the start of the year.
While headline inflation remains within the central bank’s tolerance band, underlying pressures intensified meaningfully. Core inflation accelerated to 4.52% y/y, its highest reading since March 2024, and has now remained above the upper bound of Banxico’s 3% ±1% target range for nine consecutive months. On a monthly basis, core prices rose 0.60%, driven by both processed goods and services, highlighting the persistence of cost pass‑through from fiscal measures and suggesting that price‑setting behavior remains highly sensitive to policy‑induced shocks early in the year.
This backdrop provides a clear rationale for Banco de México’s decision to hold its benchmark rate at 7.00% at its 5 February 2026 meeting, a move that was unanimously approved by the board. The pause follows a prolonged easing cycle of twelve consecutive rate cuts totaling 425 basis points, which lowered the policy rate from 11.25% to 7.00% between mid‑2024 and December 2025. Policymakers explicitly cited upward revisions to near‑term inflation forecasts and a delay in the projected convergence to the 3% target until the second quarter of 2027 as justification for stepping away from the prior easing bias.
By pausing at this level, Banxico gains time to assess the full inflationary impact of fiscal changes, minimum‑wage adjustments, and potential trade‑related tariff pressures, while keeping monetary conditions sufficiently restrictive to anchor medium‑term expectations. Importantly, the decision underscores a shift from automatic easing toward data‑dependent policy calibration, signaling that any future moves will hinge on a sustained improvement in core inflation dynamics amid ongoing global uncertainty.
Markets appear to be internalizing this more cautious stance, particularly in FX derivatives pricing. Recent movements in USD/MXN implied volatility and risk reversals across the curve point to rising hedging demand. At‑the‑money volatility has drifted toward the upper end of its six‑month range, most notably in the short‑dated (one‑week) and longer‑dated (nine‑month) tenors, consistent with heightened sensitivity to near‑term policy and macro risks. At the same time, risk reversals remain decisively positive and elevated relative to historical percentiles, indicating a pronounced market preference for USD call / MXN put protection and a bias toward guarding against peso weakness.
Taken together, this pricing behavior suggests that investors are bracing for increased exchange‑rate volatility and are willing to pay a premium for dollar upside insurance. In this context, Banxico’s decision to pause rate cuts acts as a critical stabilizing anchor for the peso, preserving an attractive yield differential that helps counterbalance rising volatility expectations and speculative positioning pressures in the FX market.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: February 9 – 13
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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.
