The FX Daily has revealed a fascinating insight into the world of foreign exchange. A potential game-changer in the USD/JPY market has been exposed! The Fed's actions have sent ripples through the financial world, and we're here to break it down for you.
Last night's release of the January FOMC minutes confirmed a significant development: the New York Fed, acting on behalf of the US Treasury, checked USD/JPY rates. This move adds weight to the belief that Washington is open to a weaker dollar. But here's where it gets controversial... the Fed's intentions seem to be two-sided. While some participants prefer a rate hike if inflation remains high, the broader message suggests further rate cuts are on the horizon.
Our take? The focus will shift back to inflation readings. If these fall, as expected, the Fed will likely cut rates twice this year. And this is the part most people miss: the Fed's transparency on the USD/JPY rate check. It's an extremely rare move in FX markets, indicating a more proactive White House approach to currency management.
The timing of the check, at 5:00 pm London time on January 23rd, when USD/JPY was trading around 157, was strategic. With both Washington and Tokyo sharing a desire to prevent USD/JPY from surpassing 160, and monetary policies aligning, we anticipate increased interest in selling USD/JPY in the 156-158 range.
Today, attention turns to initial claims and the December trade surplus. President Trump's social media post about a narrowed trade deficit and potential trade surpluses adds to expectations of a strong 4Q25 GDP figure. While DXY may drift towards 98.00, the market's sell dollar sentiment persists.
In the EUR market, European bourses are outperforming their US counterparts. The Eurostoxx 50 has nearly doubled the S&P 500's performance in dollar terms. However, US TIC data hasn't fully supported the rotation thesis yet. December saw strong foreign demand for US equities, and US residents buying foreign equities. The release of the Balance of Payments data will provide insight into eurozone portfolio inflows, which have kept the trade-weighted euro strong.
We believe the FOMC minutes don't justify EUR/USD trading significantly below 1.18, and we maintain our forecast of EUR/USD ending March near 1.19.
The Swiss franc remains incredibly strong, with inflows potentially driven by the dollar de-basement trade or positioning for a US strike on Iran. The Swiss National Bank's tools to combat this strength are limited. Until the US military presence in the Middle East eases, EUR/CHF will likely remain under pressure. While the SNB doesn't want to take the policy rate negative again, the market may price in a full 25bp rate cut over the next year.
In the CEE region, Polish data confirms stable growth and a gradually easing labour market. December's industrial production exceeded expectations, but a repeat is unlikely in January. Wage growth surprised in December due to annual bonuses, but overall, we expect solid, stable growth. This should allow for further National Bank of Poland rate cuts, possibly as early as the March meeting, unless today's numbers bring a significant surprise.
The zloty's relationship with interest rate differentials is not yet strong, and global volatility is not expected to increase this week. Therefore, EUR/PLN is likely to remain within the 4.200-230 range.
So, what's your take on these developments? Do you agree with our analysis? We'd love to hear your thoughts in the comments below!
