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A collection of good and bad news affecting the foreign exchange market
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Decision Analysis]: A collection of good and bad news that affects the foreign exchange market." Hope this helps you! The original content is as follows:
Since the beginning of 2026, the foreign exchange market has become more volatile, with long and short factors intertwined. On January 5, traders need to focus on core variables such as Fed policy uncertainty, geopolitical conflicts, and divergence of economic data from major economies. The following is a summary of the core good and bad news that affected the foreign exchange market that day to help grasp the market context.
1. Summary of core good news
The momentum of RMB appreciation continues, and policies and funds resonate well. On the first trading day of 2026, the offshore RMB exchange rate against the US dollar rose above 6.97 for the first time in two and a half years, reaching a maximum of 6.9664, a new high since May 2023, continuing the appreciation trend at the end of 2025. In terms of supporting factors, on the one hand, the demand for foreign exchange settlement by enterprises at the end of the year was intensively released, and the unsettled foreign exchange surplus of US$900 billion was returned, forming short-term financial support; on the other hand, the cross-border payment of digital renminbi broke through, with transactions accounting for 95.3% of the multilateral central bank's digital currency bridge business. The CIPS system is about to be expanded to cover 190 direct participants, and the process of internationalization of the renminbi is accelerating to strengthen long-term confidence. In addition, the interest rate gap between China and the United States continues to narrow, and the net inflow of northbound funds exceeds 80 billion yuan in a single month, further boosting the strength of the renminbi.
The U.S. dollar credit premium weakened, giving non-U.S. currencies some breathing space. According to data from the International Monetary Fund, the U.S. dollar's share of global foreign exchange reserves fell to 56.9% in the third quarter of 2025, falling below 60% for 11 consecutive quarters, setting a 30-year low. The U.S. dollar index fell 9.4% throughout the year in 2025, and continued its weak trend at the beginning of the year, falling below the 98 mark, providing an appreciation window for non-U.S. currencies such as the euro and the renminbi. At the same time, ASEAN is advancing its local currency settlement strategy and the promotion plan for 2026-2030 has been accelerated.In recent years, the global "de-dollarization" process has accelerated, further weakening the foundation of the dollar's strength.
Inflation in the Eurozone has stabilized, and expectations of interest rate cuts have supported the stabilization of the exchange rate. The European Central Bank kept interest rates unchanged at its December 2025 interest rate meeting and stated that inflation is expected to return to the 2% target in 2026. Although the manufacturing PMI in the Eurozone is weak, core inflation has fallen back to 2.4%, pressure on wage growth has eased, and the market is betting on the start of an interest rate cut cycle in the first quarter of 2026. The expected certainty supports the euro to stabilize around 1.09 against the US dollar to a certain extent, avoiding sharp depreciation.
2. Sorting out the core bad news
The Fed’s policy independence is being challenged, and the risk of dollar fluctuations is intensifying. Political polarization in the United States has intensified. The Trump administration has frequently put pressure on the Federal Reserve. The political dismissal of a Federal Reserve Board member in 2025 has shaken the foundation of the central bank system. The market has doubts about the credibility of the Federal Reserve's policies. The non-agricultural data to be released on January 9 may be distorted due to the previous government shutdown, making data interpretation more difficult. If the data is strong, the market may question its authenticity; if the data is weak, it may raise concerns that the Federal Reserve will be forced to be overly easing. Both scenarios may lead to abnormal fluctuations in the US dollar and exacerbate market uncertainty.
Geopolitical conflicts escalate, and risk aversion disrupts exchange rate trends. The US military raided Venezuela and captured Maduro and his wife, triggering protests in many countries around the world. Russia has sent a frigate to the Caribbean as a warning, raising regional tensions. As an oil-exporting country, Venezuela is promoting the de-dollarization process. This incident further exposed the risk of "weaponization" of US dollar settlement and accelerated global de-dollarization. However, short-term risk aversion may trigger periodic changes in funds and disrupt the trends of major currencies. At the same time, oil prices surged 8.7% in half a day to exceed US$90 per barrel, which was also indirectly transmitted to the foreign exchange market.
The momentum of global economic recovery has weakened, and weak trade has suppressed risk currencies. The International Monetary Fund predicts that global economic growth will drop to 3.1% in 2026, and the growth rate of developed economies will be only 1.6%; the World Trade Organization even predicts that the growth rate of global merchandise trade volume will plummet to 0.5%, almost stagnating. The euro zone's economic recovery was sluggish. In the fourth quarter, the German and French economies only grew slightly by 0.1% quarter-on-quarter, and the manufacturing PMI shrank across the board, dragging down the performance of the euro. The contraction of global aggregate demand and the rise of trade protectionism have www.xmtraders.combined to suppress www.xmtraders.commodity currencies such as the Australian dollar and Canadian dollar and risk currencies such as the euro.
3. Core tips for trading
In the short term, we need to focus on the U.S. non-farm data and the reaction of U.S. bond yields on January 9, especially changes in long-term inflation expectations; in the medium term, we will track the political background of the candidate for the chairman of the Federal Reserve, and the easing-leaning nomination may accelerate the sell-off of U.S. dollar assets. Operationally, the RMB is strong in the short term but needs to be alert to the risk of overshooting. It is recommended that enterprises establish a neutral awareness of exchange rates and use option tools to hedge risks; the euro focuses on the key support level of 1.09. Against the background of intensified US dollar fluctuations, it is advisable to strictly control positions and avoid unilateral bets. Geopolitical events are of sudden nature, so it is necessary to reserve room for risk hedging and closely follow the situation in Venezuela and the diplomatic statements of major countries on capital flows.directional influence.
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