• PCE, PMI and CPI updates.

• SCOTUS decisions to steer tariff outlook and Fed credibility.

•  Norges Bank and BOJ poised to keep rates steady.
  

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USD grinded higher last week supported by favorable US economic activity. USD caught a bid Friday and Treasuries slumped after President Donald Trump voiced his preference at keeping National Economic Council Director Kevin Hassett in his current job rather than appointing him Fed chair. Hasset was widely regarded as the most dovish of the Fed chair finalists, recently stating that he shares President Trump’s view that rates can be “a lot lower.”

As such, Hasset’s sidelining prompted an upward repricing of the Fed funds futures curve as betting markets slashed his odds of becoming Fed chair. In contrast, Kevin Warsh’s (former Fed Governor) probability to get the Fed chair job have surged, making him the frontrunner by a wide margin, followed by Rick Reider (fixed-income chief at BlackRock) and Fed Governor Christopher Waller. President Trump could announce his Fed chair pick this week.

USD can extend last week’s gains, mostly against cyclical sensitive currencies, as renewed US-EU trade tensions weigh on financial market risk sentiment. Still, we doubt the dollar index (DXY) can sustain a break above the upper end of its trading range in place since June. Most major central banks are done easing, while the Fed has room to deliver additional rate cuts. Also, the PMIs this week risk showing the US growth lead shrinking.

US-EU Ties Tested

US and Europe on the verge of a full-blown trade war. On Saturday, President Donald Trump said that “Starting on February 1, Denmark, Norway, Sweden, France, Germany, the United Kingdom, The Netherlands, and Finland, will be charged a 10% Tariff on any and all goods sent to the United States of America” because these countries “have journeyed to Greenland, for purposes unknown.” Trump added, “On June 1st, 2026, the Tariff will be increased to 25%. This Tariff will be due and payable until such time as a Deal is reached for the Complete and Total purchase of Greenland.”

In response, European Commission President Ursula von der Leyen and European Council President António Costa – warned in a joint statement “Tariffs would undermine transatlantic relations and risk a dangerous downward spiral.” EU capitals are considering hitting the US with €93bn worth of tariffs on goods and using the so-called anti-coercion instrument (ACI) that can limit the access of American companies to the EU. Moreover, the EU is poised to halt approval of the EU-US trade agreement which was struck on July 27, 2025.

Technically, the next three support levels for EUR/USD are offered at 1.1590 (the 200-day moving average), 1.1500 (November double bottom), and 1.1400 (July/August lows). We expect EUR/USD to hold above 1.1500, if not 1.1400.

SCOTUS Update

The US Supreme Court (SCOTUS) decision on President Trump's use of emergency tariff powers could come Tuesday. Online betting markets give 33% chance the court will uphold the tariffs.

SCOTUS will hear arguments on Wednesday related to President Trump’s efforts to fire Fed Governor Lisa Cook. If the court finds in Cook’s favor, she could be allowed to serve until her term expires in 2038. A ruling against her will further threaten the Fed’s independence, which is a structural drag on USD.

PCE on Deck

On Friday, the US November Personal Consumption Expenditure (PCE) is expected to show inflation stalling above the Fed’s 2% target and consumer spending holding up. Headline and core PCE deflators are both expected at 2.8% y/y vs. 2.8% in September, respectively. More importantly, upside risks to prices are fading and leaves room for the Fed to further unwind policy tightness. The January Fed Beige Book noted that “firms expect some moderation in price growth.” Meanwhile, real personal spending is expected at 0.3% m/m in November vs. 0.1% in September.

January’s Growth Chronicles

The PMI readings for the US, EU, UK, and Japan are published on Friday. In December, the PMIs showed a narrowing in the US growth edge over peers. If this trend persist, USD upside risks would likely be constrained. Of note, the IMF World Economic Update is due on Monday.

Norges Bank and BOJ on Hold

The Norges Bank is widely expected to leave the policy rate unchanged at 4.00% for a third straight meeting (Thursday). The Norges Bank is poised to reiterate that “the policy rate will be reduced further in the course of the coming year,” while stressing that “a restrictive monetary policy is still needed” because inflation is still too high. The Norges Bank pencils in one full 25bps rate cut to 3.75% by Q4, matching market pricing. We expect USD/NOK to hold under key technical resistance around 10.3000.

The Bank of Japan (BOJ) is widely expected to keep the policy rate at 0.75% and stick to its hiking bias (Friday). The Outlook Report will offer clues about the extent of the normalization cycle. Watch out for possible comments about the neutral rate. The BOJ currently estimates the neutral rate to be within a wide range between 1% and 2.5%. A tighter range would signal greater confidence in removing policy accommodation and underpin a firmer JPY.

Inflation Check

Canada December CPI and Q4 business outlook survey are due Monday. Headline inflation is seen at 2.2% y/y for a third consecutive month while core inflation (average of trim and median CPI) is expected at 2.7% y/y vs. 2.8% in November. For reference, the Bank of Canada (BOC) projects headline and core inflation to average 2.0% y/y and 2.9% y/y over Q4, respectively. The BOC is done easing. The swaps curve price-in 56% odds of a 25bps rate increase to 2.50% over the next twelve months. We expect USD/CAD to hold under key technical resistance around 1.4150.

UK December CPI is due Wednesday. Both headline and core inflation are seen rising to 3.3% y/y vs. 3.2% in November, while services inflation is expected to quicken to 4.6% y/y vs. 4.4% in November. Persistently above target inflation suggests the Bank of England (BOE) can afford to wait before resuming easing.

Nonetheless, the UK November labor market overview (Tuesday) and December retail sales data (Friday) can firm up BOE rate cut bets for this year. The unemployment rate is forecast at 5.0% vs. 5.1% in October, in line with the BOE’s Q4 forecast, and the policy-relevant private sector regular pay is projected to ease to a five-year low at 3.7% y/y (BOE Q4 projection: 3.5%) vs. 3.9% in October, consistent with a further loosening in the labor market.

In parallel, core retail sales volumes are expected to drop -0.1% m/m vs. -0.2% in November. The swaps curve price-in nearly 50bps of BOE rate cuts to 3.25% over the next twelve months. We expect GBP/USD to hold above key technical support at 1.3200.

Japan December CPI is due Thursday. Headline and core ex. fresh food CPI are expected to ease sharply to 2.1% y/y (prior: 2.9%) and 2.4% y/y (prior: 3.0%), respectively, reflecting base effects from last year's jump in fresh food prices and new fuel subsidies. Core ex. fresh food & energy CPI is seen at 2.8% y/y vs. 3.0% in November, underscoring the case for additional Bank of Japan (BOJ) rate hikes. The swaps curve price-in nearly 50bps of BOJ rate increases to 1.25% over the next twelve months.

New Zealand Q4 CPI is due Thursday. Headline CPI is expected at 0.4% m/m (RBNZ projection: 0.2%) vs. 1.0% in Q3 to be up 2.9% y/y (RBNZ projection: 2.7%) vs. 3.0% in Q3. Overall, the RBNZ is done easing with the swaps curve pricing-in 45bps of rate increases over the next twelve months. We expect NZD/USD to hold above key technical support at 0.5600.

Down Under Payrolls

Australia’s December labor force report is due Wednesday. The economy is projected to add 27k jobs vs. -21.3k in November and the unemployment rate is seen at 4.4% vs. 4.3% in November, in line with the RBA’s forecast. The labor market is a little tight and the RBA is done easing. RBA cash rate futures imply nearly 36bps of hikes to between 3.85%-4.10% in 2026. We expect AUD/USD to hold above key technical support at 0.6535, the 200-day moving average.