Dollar Under Water As Yen Intervention Risks Mount

Dollar tumbled to four-month lows, dragged down by Fed uncertainty and shutdown risks. Yen higher on intervention fears. Dollar weakness across the board lifted Euro and Sterling, with Wednesday’s FOMC now the critical catalyst.

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Sterling Surges As Dollar Retreats On Tariff Turmoil

The British pound dominates G10 performance, scaling a peak of near 1.3710 as markets weigh the US dollar for renewed trade frictions. President Trump’s sudden 25% tariff hike on South Korean imports reinvigorated the "Sell America" trade, driving investors toward currencies with robust domestic backdrops. Sterling remains the primary beneficiary.

January’s robust UK data confirms that British businesses recorded their fastest activity expansion since April 2024, while unexpected retail sales growth curbs the immediate need for the Bank of England (BoE) rate-cut easing. Markets now price just 36 basis points of BoE cuts by year-end.

Cross-asset flows currently favour the pound as UK 10-year gilt yields hold steady at 4.49%.

This yield support, coupled with the Labour Party’s efforts to maintain political stability, keeps the currency resilient.

While the EUR/GBP cross remains pressured near 0.8679. Cable's strength stems from dollar weakness rather than UK fundamentals. The BoE holds its policy meeting next week, leaving the pair vulnerable to Wednesday's Fed decision.

Market’s eyeing the cable strength at 1.3750 level; a clean break signalling a transition from a corrective bounce to a sustained bullish trend.

The current strength in Sterling may offer exporters a window to evaluate their margin protection strategies ahead of next week's BoE decision. For importers, while the UK economy has shown resilience, future inflation data remains a key variable; any shifts here could prompt a reassessment of BoE rate-cut expectations, which the market currently prices at a 45% probability for a second cut by end of 2026.

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Euro Holds Near Four-month Highs As Dollar Falters

The EUR/USD pair traded at 1.1878 after reaching 1.1900 Monday, its highest since September. The 14-day RSI near 69 confirms strong momentum, with technical analysts eyeing 1.1918 the highest level since June 2021.

Global risk sentiment improved despite the South Korean tariff news, as traders bet on a "de-escalation" cycle. European equity markets mirrored this optimism, opening higher. European auto sales rose for a third consecutive year in 2025, driven by affordable EV demand.

Mixed regional data, however, limits the euro’s upside potential compared to the pound. Data released today showed French Consumer Confidence met forecasts at 90, but Spanish Unemployment rate fell to 9.93% in Q4 - lowest since 2008. These releases matter less for immediate euro direction than Wednesday's Fed decision, but could influence ECB rate cut expectations.

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Dollar Submerged By Intervention Risk & Political Headwinds

The US dollar index (DXY) slumps to 97.05, impacted by concerns of potential government shutdowns, uncertainty over Fed Chair Powell’s future and yen intervention fears.

The USD/JPY surged to 154.24, recovering significantly from Friday's 159.23 low, as markets brace for coordinated intervention from the US and Japan. NY Fed rate checks have effectively checked USD/JPY upside, leaving the pair vulnerable to further downside if official action materialises.

Technical setups for USD/JPY remain bearish.

The pair currently test at 153.81. A daily close below this level hands control to bears, potentially targeting the 152.00 handle. Conversely, sustained trade above this mark keeps a neutral bias anchored ahead of tomorrow’s FOMC decision.

The Fed's two-day meeting starts today, under extraordinary political pressure from Trump's criminal investigation of Powell and efforts to fire Governor Lisa Cook.

Markets are pricing in no change to rates at this meeting, with around 50 basis points of cuts in 2026.

Focus remains on Fed independence, with any indication of Powell yielding to political pressure likely to trigger further dollar selling.

Trump's surprise 25% tariff hike on South Korea reminded markets that policy unpredictability remains permanent, adding to dollar pressure.

Commodity currencies benefited against the dollar, with the Aussie at $0.6914 and the loonie holding prior gains.

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Look Ahead: Fed Decision and Intervention Risk Dominate

Wednesday: Fed FOMC Policy Decision. While no rate change is expected, any signal regarding Fed independence or the timing of the next cut will drive market volatility.

Thursday-Friday: Eurozone data and potential ECB commentary. US Non-Farm Payrolls (NFP)

Any official yen intervention confirmation impacts USDJPY significantly.

Next Week: BoE expected to hold rates. UK data and forward guidance determine whether sterling's rally continues.

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Market Summary:

The "Sell America" trade dominates the flow, making USD rallies a potential area for exposure reduction. Market participants may look to GBP/USD toward $1.3750, keeping tight risk management levels at $1.3580. Businesses with US dollar liabilities should evaluate their current hedging ratios; if the Fed fails to deliver a hawkish surprise tomorrow, the dollar’s descent toward 96.00 will likely accelerate.

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