What to trade this week as the Dollar dominates, Yen rises, and other currencies face headwinds

Currency strength overview

• USD (Very strong - Very bullish): The dollar's dominance continues, underpinned by a hawkish Fed, a resilient US economy, and safe-haven demand. (Rating: No change).

• JPY (Strong - bullish): The Yen remains strong, driven by expectations of a BOJ policy shift towards normalization and a moderately recovering economy. (Rating: No change).

• CHF (Moderately strong - moderately bearish): Safe-haven appeal supports the CHF, but the SNB's dovish stance and potential intervention limit upside. (Rating: Downgraded from Strong - Moderately Bullish).

• EUR (Weak - bearish): The Euro's weakness persists due to the ECB's dovish stance, political uncertainty in key member states, and a stronger USD. (Rating: No change).

• GBP (Weak - bearish): The GBP faces headwinds from the BoE's cautious approach, sluggish economic growth, and persistent inflation. (Rating: No change).

• CAD (Weak - bearish): The Loonie remains weak, pressured by a dovish BoC, slowing growth, political uncertainty following Trudeau's resignation, and the looming threat of US tariffs. (Rating: Downgraded from Moderately Weak - Bearish).

• AUD (Weak - bearish): The AUD's bearish outlook persists due to a cautious RBA, weak domestic data, concerns about the Chinese economy, and a stronger USD. (Rating: No change).

• NZD (Very weak - Very bearish): The NZD remains very weak, weighed down by the ongoing recession, aggressive RBNZ easing, weak domestic demand, and external headwinds. (Rating: No change).

USD: King Dollar reigns supreme amid hawkish Fed and Trump's shadow

The US dollar has rallied due to a less dovish Federal Reserve and safe-haven demand. The Fed's December meeting minutes and recent speeches indicate a slower pace of easing in 2025. Trump's policies, particularly on trade, inject volatility. The Fed's interest rate decision on January 29th and upcoming economic data releases will be closely watched. The US dollar maintains a Very Strong rating and Very Bullish outlook due to the Fed's stance, a resilient US economy, and safe-haven demand.

CAD: Loonie on thin ice as Trudeau exits and tariffs loom

The Canadian Dollar (CAD) has dropped due to Prime Minister Trudeau's resignation and the threat of US tariffs under the Trump administration. The Bank of Canada's dovish stance and the possibility of further easing have also weakened the CAD. The upcoming BoC interest rate decision and Monetary Policy Report will be crucial for the CAD, as will the evolving US trade policy and the performance of the Canadian economy. The fundamental outlook for the CAD remains Weak with a Bearish sentiment, and selling the CAD appears to be the favored strategy.

GBP: Sterling on the ropes as BoE mulls rate cuts

The British Pound (GBP) is weak due to the Bank of England's cautious monetary policy, sluggish economic growth, and persistent inflation. The market is pricing in a potential BoE rate cut in early 2025, fueled by weak economic data. The GBP has underperformed against major currencies, driven by the BoE's dovish tilt and concerns about the UK economy. The new Labour government's fiscal policies, including increased spending and potential tax changes, are also being monitored by the market. Geopolitical factors, such as the UK's relationship with the EU and potential trade tensions with the US, add further complexity.

Looking ahead, the BoE's policy path, UK economic performance, and political developments under the new government will drive GBP sentiment. The fundamental outlook remains Weak with a Bearish sentiment. Selling the GBP seems favored, but traders should remain cautious and monitor BoE communications, economic data, and political shifts.

EUR: Euro caught between ECB easing and political headwinds

The Euro (EUR) is weak due to the European Central Bank's (ECB) dovish monetary policy and concerns about the Eurozone's economy and political stability. The ECB's key interest rate is 3.15%, and the market expects further rate cuts in 2025. The Eurozone economy is projected to grow by only 0.7% in 2024, and political instability in France and Germany adds to the uncertainty. The EUR has underperformed over the past six weeks. The next ten days will be crucial, with the ECB's interest rate decision on January 30th being closely watched. The fundamental outlook for the EUR remains Weak with a Bearish sentiment, and selling the EUR appears to be the favored strategy at the moment.

CHF: Swiss Franc navigates safe-haven flows and SNB's Dovish stance

The Swiss Franc (CHF) has a moderately strong fundamental rating, supported by Switzerland's stable political environment, strong economy, and the currency's safe-haven status. However, the Swiss National Bank's (SNB) dovish monetary policy, including a rate cut in December 2024 to 0.5%, contributes to a moderately bearish sentiment outlook. The CHF's recent performance has been mixed, with periods of strength amid global uncertainties and weakness following the SNB's rate cut. The outlook for the CHF is uncertain, with key drivers being the interplay between safe-haven demand, SNB policy, and global economic developments. While safe-haven demand could support the currency, the SNB's actions and the potential for further easing limit the upside potential. Traders should closely monitor SNB communications, economic data, and geopolitical developments.

JPY: Yen bulls charge as BoJ signals policy shift

The Japanese Yen (JPY) has a strong fundamental rating and a bullish sentiment outlook due to the Bank of Japan's (BOJ) recent rate hike and potential further tightening. The JPY has appreciated significantly over the past six weeks, driven by speculation about the BOJ's policy intentions. The next ten days will be relatively quiet on the Japanese economic calendar, but the market will be closely watching for any comments from BOJ officials. Over the next six weeks, the BOJ's policy decisions, economic data releases, and global risk sentiment will be key drivers of JPY sentiment. Buying the JPY appears to be the favored strategy, but traders should be mindful of the "buy the rumor, sell the fact" phenomenon.

AUD: Aussie under pressure as RBA rate cut speculation mounts

The Australian Dollar (AUD) has a weak outlook due to a cautious Reserve Bank of Australia, weak domestic data, concerns about China's economy, and a strong US dollar. Recent AUD underperformance is driven by RBA's dovish tilt and global economic concerns. The RBA's cautious stance and potential rate cut expectations have fueled bearish sentiment. Key drivers for AUD in the coming weeks include RBA's policy, China's economy, and US trade policy. Selling AUD seems favored, but traders should monitor RBA communications, economic data, and US-China trade relations.

NZD: Kiwi remains in the doldrums amid recession and Dovish RBNZ

The New Zealand Dollar (NZD) is fundamentally weak and bearish due to a technical recession, a dovish RBNZ stance, and a deteriorating economic outlook. It has been the worst-performing major currency over the past six weeks, with some volatility due to a weaker USD and China's steady loan prime rates, but later weakened by concerns over Trump's trade policies. The next ten days will be quiet on the NZ economic calendar, but the Q4 inflation data on January 21st will be closely watched. Over the next six weeks, the RBNZ's policy stance, economic data, and global risk sentiment will be crucial in determining the NZD's trajectory. Selling the NZD seems favored, but traders should monitor RBNZ communications, economic data, and global commodity prices and trade relations.

Concluding this week's analysis

The upcoming week promises to be eventful, with key central bank decisions, crucial economic data releases, and the ongoing saga of Trump's trade policies. The potential for increased trade tensions between the US and its trading partners, particularly China, will also be a significant driver of market sentiment.

Key economic indicators to watch

• Jan 29: AU Inflation Rate YoY (Q4). Forecast: 2.20%. Lower-than-expected inflation could reinforce the RBA's dovish stance and pressure the AUD.

• Jan 29: CA BoC Monetary Policy Report. This report will offer crucial insights into the BoC's economic and inflation outlook, shaping market expectations for future policy moves. A dovish outlook could further weaken the CAD.

• Jan 29: CA BoC Interest Rate Decision. Forecast: 3.00%. The market anticipates a potential rate cut, which would likely weaken the CAD. A hold decision might provide temporary support, but the overall outlook remains bearish.

• Jan 29: US Fed Interest Rate Decision. Forecast: 4.50%. A hawkish stance or signals of fewer rate cuts than anticipated could strengthen the USD.

• Jan 30: EA ECB Interest Rate Decision. Forecast: 2.90%. A rate cut, as widely expected, would likely weaken the EUR, reinforcing the bearish sentiment.