Strong macro data and rate spreads are the USD’s main weapon

• The greenback’s primary weapon is the wide spread in interest rates.
• The yen is following the lead of the government and the Bank of Japan.

The US dollar continues its strong run in the forex market for almost a month. A combination of strong US macro statistics and hawkish Fed officials’ comments allows the greenback to dominate. In the week ending January 10th, Initial Unemployment Claims fell to 198K. In recent years, the figure has only occasionally fallen below 200K. Its 4-week average fell to the lowest in two years. This points to a stabilisation of the labour market and deprives the FOMC doves of their key trump card.

The EURUSD has been falling for 11 of the last 15 sessions and has reached its lowest since early December. According to Credit Agricole, the idea of divergence in the monetary policies of the Fed and the ECB will not be realised. The Fed will leave rates unchanged in 2026, and the wide spread with the deposit rate will become the primary weapon of the US dollar. Bank of America warns that the ECB’s dissatisfaction with inflation dynamics may force it to resume its cycle of monetary expansion. This will put pressure on the euro.

It seems the only hope for EURUSD bulls is Donald Trump, who dreams of lowering the federal funds rate to 1%. However, the US president has tied his own hands with a lawsuit against Jerome Powell. Now, candidates close to him for the position of Fed chairman may be rejected by the Senate due to concerns about the independence of the central bank.

The only currency performing better than the dollar recently is the yen. USDJPY gave way to fears of possible currency interventions, as hinted at by Japanese Finance Minister Satsuki Katayama. According to Bloomberg insiders, the BoJ is focusing its attention on the pro-inflationary impact of a weak yen. Although no rate hike is expected in January, further policy tightening may remain on the table. Experts do not expect an overnight rate hike before July.

Reduced geopolitical risk, supported by developments involving Venezuela and Iran, has put pressure on gold prices. The strong dollar and rising US Treasury yields are also weighing on gold. However, the precious metal’s reluctance to correct in difficult conditions speaks to its strength.

The FxPro Analyst Team