USD: Political risk cluster and JPY intervention talk drive a reset

The dollar slid close to 2% last week, its weakest run since May 2025 (pushing GBP/USD above 1.3660 and EUR/USD above 1.1850), and selling pressure carried into the Asia session. Tariff headlines played a role, but the bigger impulse came from a concentrated burst of US political and policy risks. Trump’s tougher posture on Greenland and the use of tariffs as leverage coincided with renewed noise around the Fed, including the DoJ’s Powell-related probe, uncertainty over the leadership handover and a Supreme Court test of tariff powers. Each theme was familiar, but the timing created a sharper risk premium.

JPY dynamics then added another leg. Markets increasingly priced the chance of coordinated action by Japan and the US to restrain yen weakness, pushing USD/JPY down to the mid-153s on Friday. The messaging mattered in two ways: it implicitly signalled less resistance from Washington to a weaker dollar, and it raised perceived downside risk in USD/JPY. That combination undermined JPY-funded carry and reduced a key source of marginal USD demand.

Positioning did the rest. Leveraged accounts have flipped to net short USD in recent weeks, accelerating as the Powell headlines hit. Some of the move looks caution-driven, but some appears tactical, with longs trimmed in anticipation of better re-entry levels around this week’s Fed decision.

The FOMC meeting on 28 January now becomes the week’s anchor and a useful stress test. A firmer dollar after the meeting would point to last week’s move being driven more by positioning and short-term de-risking than by a durable shift in fundamentals. Beyond rates, Thursday’s nonfarm productivity and unit labour costs will also matter, particularly for those leaning on productivity strength and softer labour cost momentum to argue inflation pressures can cool without a sharp growth hit.

GBP: UK data surprises steady the ship, but the broader backdrop still caps upside

Sterling started last week on the back foot as tariff threats put the UK in focus, with GBP/EUR the cleanest expression of the pressure. Domestic releases initially did little to shift expectations given familiar themes remain in place: labour-market cooling, sticky inflation and a divided Bank of England.

That said, when expectations are anchored to softness, upside surprises travel further. Stronger retail sales and firmer PMIs helped GBP/USD trade up into the 1.35 area and supported GBP/EUR around 1.15, helped by a quick easing in geopolitical anxiety.

Near term, GBP/EUR looks less sensitive to residual geopolitics than GBP/USD. Resistance near 1.1550 remains a tough hurdle without a broader run of stronger UK data, but support around the 100-day moving average near 1.1455 looks solid. With a quiet UK calendar and limited BoE communication, sterling may trade in a more orderly fashion, though there is some risk of a partial unwind of Friday’s hawkish repricing if investors judge it as over-enthusiastic relative to the wider UK growth picture.

EUR: Dollar-led rally extends as positioning turns supportive

EUR/USD rose close to 2% last week, its best weekly performance since early April, as the move was largely driven by broad dollar weakness. If the negative USD impulse persists, the pair may reach fresh multi-year highs sooner than markets had been pricing.

Positioning may become an additional tailwind. The latest CFTC data suggest stretched EUR shorts, leaving scope for short covering to add mechanical support on top of the macro narrative.

The euro’s domestic picture remains uneven, but flash PMIs were firm enough to keep the rally intact. The composite held in expansionary territory, manufacturing output improved and confidence indicators ticked higher. This week’s France, Germany and Eurozone GDP prints, alongside sentiment releases such as Germany’s IFO and the European Commission surveys, should help validate whether improving survey momentum is translating into a more durable 2026 growth story.

Cross-market spillovers remain relevant too: further USD/JPY downside typically reinforces broader USD weakness, which can continue to feed through to EUR/USD and other majors as correlations and positioning adjust.

Looking ahead

• 28 Jan (FOMC): key determinant of whether last week’s USD sell-off was mostly tactical or a deeper reassessment.

• JPY watch: any further coordinated US-Japan signalling could keep USD/JPY downside risks elevated and weigh on the broader dollar.

• US data (Thu): productivity and unit labour costs as a cross-check on the disinflation narrative.

• UK calendar: light schedule suggests range trading for GBP, with sentiment driven more by global risk and repricing of rate expectations.

• Eurozone pulse: GDP and confidence data will test whether recent PMI resilience is translating into a firmer start to 2026.