Dollar gyrates in a tight range and remains an underperformer for the week, showing little reaction to December US consumer inflation data. With no meaningful downside surprise in the data, inflation figures effectively cemented expectations for a policy hold by the Fed at its upcoming meeting. Futures now assign around 95% probability that interest rates will remain unchanged at 3.50–3.75% at the January 28 FOMC decision.
Pricing for a March rate cut was also largely unchanged, hovering slightly above 70%. That pricing remains conditional, however, as policymakers will have two additional CPI prints in hand before deciding whether inflation is cooling fast enough.
A central question is whether tariffs could continue to feed into prices over the coming months, either lifting inflation or preventing further progress toward lower core readings. While the base case still calls for at least one more Fed cut later this year, the length of the current pause will depend on how persistent price pressures prove to be. Any sign that inflation is stabilizing rather than easing would argue for a longer hold, even if the easing cycle is not formally over.
Tariffs have returned to the macro conversation after US President Donald Trump threatened to impose a 25% tariff on countries doing business with Iran. The move risks reopening old geopolitical and trade tensions with China, Iran’s largest trading partner. Although Trump has not named China directly, renewed efforts to isolate Iran are likely to sharpen scrutiny of Belt and Road Initiative, where Iran plays a strategic role as a transit hub for Chinese goods into the Middle East under President Xi Jinping’s flagship project.
In FX performance terms this week, Yen sits firmly at the bottom of the ladder, followed by Dollar and then Euro. Kiwi leads gains, with Sterling and Swiss Franc also outperforming. Aussie and Loonie trade in the middle.
In Europe, at the time of writing, FTSE is down -0.09%. DAX is up 0.33%. CAC is down -0.14%. UK 10-year yield is up 0.19 at 4.394. Germany 10-year yield is up 0.019 at 2.863. Earlier in Asia, Nikkei rose 3.10%. Hong Kong HSI rose 0.90%. China Shanghai SSE fell -0.64%. Singapore Strait Times rose 0.85%. Japan 10-year JGB yield rose 0.07 to 2.167.
US CPI meets headline, core undershoots at 2.7% in December
US consumer inflation data for December delivered a largely reassuring signal. Headline CPI rose 0.3% mom, in line with expectations. Core CPI increased just 0.2%, undershooting forecasts for a 0.3% gain.
Shelter was the dominant driver of monthly inflation, rising 0.4% and accounting for the largest share of the overall increase. Food prices were also firm, with the food index climbing 0.7% on the month, matching gains in both food at home and food away from home. Energy prices edged up 0.3% in December, contributing modestly to headline pressures.
On an annual basis, CPI was unchanged at 2.7% yoy, matched expectations. CPI core unchanged at 2.6% yoy, below expectation of 2.7% yoy. Energy prices rose 2.3% yoy, while food inflation increased 3.1%.
Australia Westpac consumer sentiment deteriorates, RBA won’t tighten precipitously
Australian consumer sentiment weakened further at the start of the year, highlighting growing anxiety over the interest-rate outlook. The Westpac Consumer Sentiment Index fell -1.7% mom to 92.9 in January, pushing sentiment deeper into pessimistic territory.
Westpac pointed to a sharp shift in rate expectations as the main drag. Nearly two-thirds of consumers who expressed a view now expect mortgage rates to rise over the next 12 months, more than double the share seen back in September.
For policy, Westpac expects the RBA to stay on hold when it meets on February 2–3, and through the remainder of 2026. While the RBA has flagged readiness to tighten if inflation proves stubborn, softer labor market conditions and limited price pressures across many goods and services should allow inflation to drift back into the 2–3% target range without the need to “tighten precipitously.”
NZIER confidence hits 10-year high, RBNZ to hold until H2 hike
New Zealand business confidence surged in Q4, reinforcing signs that an economic recovery is starting to form. The New Zealand Institute of Economic Research (NZIER) said a net 39% of firms expect better general economic conditions in the months ahead, a sharp rise from 17% in the September quarter and the strongest reading since March 2014.
NZIER noted that while a gap remains between headline confidence and firms’ own domestic trading activity, the direction of travel is clearly improving. The survey suggests the impact of earlier interest-rate cuts is now filtering through the broader economy, lifting sentiment even as activity indicators lag.
Inflation signals was reassuring. Cost and pricing indicators point to broadly contained pressures in the December quarter, with cost pressures easing and a net 37% of firms reporting higher costs.
With demand recovering but inflation subdued, NZIER expects no further OCR cuts this cycle, forecasting the RBNZ’s Official Cash Rate to trough at 2.25% before hikes begin in the second half of 2026.
CHF/JPY breaks records as Yen rout meets Fed worries, targets 205 if momentum builds further
CHF/JPY surged to a fresh record high today, driven primarily by accelerating Yen weakness and, to a lesser extent, renewed support for the Swiss Franc. The cross has become a focal point for markets expressing both Japan-specific political risk and broader institutional unease centered on the US.
The Yen leg of the move was triggered by widespread reports that Japanese Prime Minister Sanae Takaichi intends to dissolve the House of Representatives at the outset of the regular Diet session on January 23, paving the way for a snap general election. The decision was reportedly conveyed to senior members of the ruling Liberal Democratic Party.
With Takaichi’s cabinet enjoying strong approval ratings nearly three months into her term, markets see the move as a calculated gamble to stabilize a fragile governing position. The ruling coalition currently holds only a razor-thin majority in the lower house, raising incentives to seek a fresh mandate while political momentum remains favorable.
If the lower house is dissolved on January 23, official campaigning could begin as early as January 27 or February 3, with voting widely expected on February 8 or February 15. An early election would allow Takaichi to push her agenda of expansionary fiscal spending.
Beyond domestic economics, a renewed mandate could also strengthen Takaichi’s hand on foreign policy. Her recent parliamentary remarks on Japan’s potential response to a Taiwan contingency have already contributed to deteriorating Japan–China relations, and an election win would give her greater backing to confront diplomatic challenges.
At the same time, the Swiss Franc has found support from safe-haven demand as confidence in the US Dollar softens. The Donald Trump administration’s threat of criminal indictment against Fed Chair Jerome Powell has raised concerns about the durability of US institutional credibility, diverting some defensive flows toward the Franc.
Technically, CHF/JPY’s uptrend resumed decisively this week with a break above 198.53. Near-term outlook remains bullish as long as 196.03 support holds, with the next target at the 138.2% projection of 173.06 to 186.02 from 183.95 at 201.86. A break higher in D MACD above its signal line would confirm strengthening momentum and open scope for further gains toward 161.8% projection at 204.91.
GBP/USD Mid-Day Outlook
Daily Pivots: (S1) 1.3409; (P) 1.3447; (R1) 1.3504; More…
GBP/USD is staying in range between 1.3389/3567 and intraday bias remains neutral. On the upside, break of 1.3567 will resume the rally from 1.3008 towards 1.3787 high. On the downside, break of 1.3389 will resume the fall from 1.3567. Sustained break of 55 D EMA (now at 1.3374) will argue that the decline is another falling leg in the corrective pattern from 1.3787. In this case, deeper fall should be seen back to 1.3008 support.
In the bigger picture, price actions from 1.3787 (2025 high) are seen as a correction to the larger up trend from 1.3051 (2022 low). Deeper decline could be seen as the pattern extends, but downside should be contained by 38.2% retracement of 1.0351 to 1.3787 at 1.2474 to bring rebound. Break of 1.3787 for up trend resumption is expected at a later stage.
