Economic Update

26 January 2026

Markets weigh USD weakness ahead of key data and central bank events

US data last week delivered a broadly constructive picture, although several releases highlighted areas of weakness. December pending home sales fell sharply, reversing November’s gain. The November leading index also declined more than expected, and personal income growth slowed in October and November while spending accelerated.

Other releases painted a more positive backdrop: annualised Q3 GDP received a modest upward revision, initial jobless claims undershot expectations, and the University of Michigan’s consumer sentiment index was revised higher.

Despite this generally supportive data, the USD weakened sharply. Market participants appeared more focused on speculation of rate checking from both Japanese and US authorities, rather than on the underlying data or the limited probability of a near‑term US rate cut before the end of June

The key question is whether the selloff can continue as the Federal Reserve meeting approaches. It remains difficult to see a compelling reason for sustained USD weakness. Chair Jerome Powell is likely to emphasise uncertainty around the inflation outlook and the recent resilience in activity data during the post‑decision press conference. Even so, markets may extend USD selling unless they receive a clear catalyst for reversal. At present, momentum rather than fundamentals appears to be driving the move.

Euro Area Q4 GDP in focus as hopes of an upturn remain

The euro spent much of last week responding to commentary from ECB President Christine Lagarde and Bundesbank President Joachim Nagel, both of whom expressed concern about the region’s weak growth trajectory. Their remarks arrived alongside secondary data and surveys that showed tentative improvements in confidence but little acceleration in current activity.

This week offers a fuller set of releases ahead of the ECB’s first Governing Council meeting of the year in the week commencing 2 February. The German IFO business climate index, along with consumer and business confidence data from several member states, will provide additional colour. However, the first estimate of Euro Area Q4 GDP and a series of CPI releases across the bloc will carry greater weight.

Q4 GDP is expected to show modest quarterly growth of around 0.2%. There is potential for a marginal upside surprise given recent improvements in sentiment indicators. CPI data should continue to highlight a gradual cooling in inflation, which could offset any EUR support derived from stronger growth.

Limited UK data makes additional GBP upside challenging

Sterling strengthened against both the USD and EUR at the end of last week, despite spending much of the earlier part of the week constrained or lower. Various explanations circulated, ranging from political developments in the UK and US, through to stronger‑than‑expected UK PMIs and technical factors around key levels.

UK fundamentals remain mixed. Headline CPI inflation overshot expectations, although core inflation remained subdued. Labour market data showed strength in public sector wages and LFS employment, but weakness in private sector earnings and HMRC payrolls. Retail sales figures also reflected divergence: headline volumes rose due to strong online jewellery sales, but department store, clothing, and household goods volumes fell.

This week’s UK calendar is light, and MPC members will remain in pre‑meeting purdah ahead of the 1 February decision. The recent GBPUSD rally to multi‑month highs may interest USD buyers who believed the opportunity to hedge had passed when the pair approached $1.30 prior to the UK Budget. Sterling’s gains - also evident against the EUR - may prove vulnerable as we move toward month‑end.

Attention on Bank of Canada and Mexican Q4 GDP after both currencies gained from USD weakness

The Bank of Canada’s meeting will be closely watched after CAD strength faltered earlier in the week before recovering late on Friday. The central bank is not expected to adjust policy, supported by signs of improving labour market conditions. However, renewed tensions between the Canadian and US administrations at the World Economic Forum create fresh uncertainty around trade. Any escalation could weigh on growth while exerting upward pressure on prices - an uncomfortable combination for policymakers and the CAD. Even so, there may be scope for further CAD gains against a softer USD.

For the MXN, attention will turn to Q4 GDP at the end of the week. The peso continues to appreciate against the USD, with the recent test of 17.35 creating the potential for a move below 16. If Q4 GDP exceeds expectations (consensus: 0.6% q/q), it could accelerate the currency’s recent gains, which have been more pronounced against the USD than against other major pairs.

Banxico is unlikely to adjust policy at the upcoming meeting. Stronger GDP data would argue against further easing, although moderating inflation and a firmer MXN give policymakers additional flexibility if needed.

Author 

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.