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Policy and data struggle, the US dollar is trapped in a dilemma of high volatility and low confidence

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Hello everyone, today XM Forex will bring you "[XM Forex]: Policy and data struggle, the US dollar is trapped in a dilemma of high volatility and low confidence." Hope this helps you! The original content is as follows:

Asian Market Trends

The U.S. dollar continued to weaken on Monday after falling to a four-month low against a basket of currencies, while the Japanese yen surged on speculation of joint U.S.-Japanese intervention in currency markets. As of now, the US dollar is quoted at 97.09.

Overview of Foreign Exchange Market Fundamentals

Trump: The South Korean Congress has still not approved the trade agreement between the two countries and increased South Korea's reciprocal tariff rate from 15% to 25%.

Trump will deliver a speech on the U.S. economy on Tuesday. ·US media: Trump believes Iran wants to reach a deal.

The forecast platform shows that the probability of a U.S. government shutdown before the end of January is about 80%.

Summary of institutional views

Goldman Sachs: Risk aversion and intervention have failed at the same time, and the yen is still bearish below the red line

We have observed that before last Friday, although domestic fiscal concerns and the balanced tone of the Bank of Japan meeting offset the reappearance of risk aversion to a certain extent, the USD/JPY remained range-bound for most of the week. However, a striking feature is that the yen has underperformed most other major currencies and has not fulfilled its traditional safe-haven hedging function, which is in sharp contrast to the market performance in April last year. We expect this dynamic to continue in the short term, based on two core judgments: first, our baseline forecast implies that the risk environment will remain benign, which will continue to favor the performance of procyclical currencies and suppress safe-haven currencies; second, as the House of Representatives elections approach, the marketMarket risk bias favors further increases in fiscal risk premiums.

At the intervention level, we believe that some form of intervention space may limit the upside of USD/JPY to a certain extent. If the Japanese Ministry of Finance carries out the operation of buying yen, the depreciation pressure may be alleviated. The "currency checks" observed in the market on Friday further increase this possibility, as historical experience shows that such checks are often a precursor to actual intervention. However, we must emphasize that when the broad fundamental backdrop (as it does now and in 2022) justifies currency stress, direct monetary operations will often only provide temporary relief. In contrast, a more effective approach is for the Bank of Japan to take faster and more decisive action to raise interest rates to curb inflation expectations, although the current high degree of coordination between the Japanese government and the central bank makes this path more difficult.

We believe that the most successful form of "intervention" will actually be a shift in the government's fiscal policy program. Notably, markets may be underestimating the risk of a disappointing election result for the governing coalition, which could unexpectedly drive a sharp pullback in fiscal risk premiums. Overall, we remain cautiously bearish on the JPY in the near term and believe risks are skewed to the upside relative to our USD/JPY forecast path. However, USD/JPY faces modest downside risks if the proposed consumption tax cut does not materialize as expected, or if U.S.-Japan policy spreads narrow in line with our baseline forecast.

Goldman Sachs: Foreign exchange has ushered in a mean reversion window, and the U.S. dollar has a chance to rebound against European currencies.

We believe that tariffs are having a profound impact on the trend of the U.S. dollar through multiple www.xmtraders.complex channels. Direct changes in the terms of trade affect the exchange rate, while rising policy uncertainty inhibits economic activity and investment willingness. More critically, potential diplomatic responses and investor position adjustments based on changes in cross-asset correlations are triggering significant hedging flows. Each of these channels played a key role in last week's USD correction. Although the market had previously priced in very strong US growth, the risk aversion at the beginning of the week and the subsequent procyclical sector rotation clearly reflected a shift in global asset allocation, which is consistent with the market's repricing of tariff risks and European fiscal expansion.

Looking ahead, we maintain our expectation that the US dollar will depreciate moderately during the year. A solid global growth environment should continue to support procyclical currency performance, while the U.S. dollar's current high valuations will also face correction pressure as global investment returns level out. Market dynamics over the past two weeks have once again highlighted these key constraints, which explains why, while we are bullish on U.S. economic growth, we do not expect a parallel strengthening of the U.S. dollar. Although policy uncertainty and changes in foreign demand for U.S. dollar assets caused the foreign exchange market to be much more volatile than other cyclical assets in 2025, we do not believe that these extreme themes will continue to dominate the market in 2026.

Nevertheless, the existence of these factors at least limits the dollar's potential upside. we are paying close attentionWhether adverse cross-asset correlations will become more frequent again could spur a new round of FX hedging and trigger overshooting moves, but this is not our current baseline scenario. In the short term, we expect that the foreign exchange market will show mean reversion characteristics, and the US dollar is expected to regain some of its lost ground in the next few weeks. Especially in the cross trading against European currencies, it may usher in a periodic technical rebound window.

Academy Securities: The Fed is trapped in the shadow of inflation from the past, and January employment data is expected to be strong

The bond market is currently pricing in a probability of a rate cut in January of only 0.03% (pessimistically speaking, this is about the same probability as the Buffalo Bills winning the Super Bowl). Therefore, we will not get a rate cut this week, and it seems unlikely that a rate cut will be arranged at the March meeting. I think the argument that the "neutral rate" is lower than where the Fed expects is www.xmtraders.compelling. This argument from Milan surprised me, but I really agree with it.

January employment data is likely to be strong. We believe that because seasonal adjustments no longer reflect current seasonal realities, the data overestimated employment numbers in January and February and underestimated summer levels. The center of gravity of the construction industry has shifted from the Northeast to the South. The "gig economy" has changed the way seasonal workers are hired, and the shopping season has moved up, which means the U.S. Bureau of Labor Statistics backfilled too many jobs in January. Regardless, I admit that the January jobs report is expected to be strong, but this is more driven by "adjustment" than reality, and my case for a rate cut is based on other arguments.

The turnover rate in JOLTS data remains weak. While there has been a slight improvement and data preparations have been affected by the government shutdown, it is still below the average of the past decade. This tells me that those who have the confidence to "just quit if they don't want to do it" are not resigning, they are keeping a low profile to keep their jobs.

While I think the jobs data is worthy of attention and gives the Fed the "ammunition" it needs to at least consider cutting interest rates, I feel they are still stuck in the fantasy of high inflation. Furthermore, many members of the www.xmtraders.committee had been in the "temporary inflation" camp, which turned out to be anything but temporary. For risk managers, there is often a "stop loss" setting because when a view is wrong, it is difficult to change one's mind. People's thinking is often no longer clear. Therefore, the stop loss force triggers the change. In the corporate world, if a major strategic mistake occurs, someone will often pack up and leave. But I don’t think anyone among the “temporary inflationists” has lost their job yet. So, I think we're stuck and the Fed is struggling with its past mistakes. They are too worried about getting it wrong again to take action.

ANZ: The decline in the unemployment rate in December boosted expectations for an interest rate hike by the Reserve Bank of Australia, and quarterly inflation data became a key variable

Australia’s December labor force survey data showed strong performance, with the unemployment rate falling to 4.1%. Employment increased by 65,200, far exceeding market expectations and marking the largest monthly increase since April. Still, there appears to be some noise in the data: youth unemployment fell sharply by nearly a percentage point from 10.0%point to 9.1%, a decrease that was the main factor driving the overall unemployment rate down in December. Given the volatility in youth employment data and recent signs of slowing labor demand, we do not believe that the fall in the unemployment rate in December represents the start of a new trend.

Looking at the full year of 2025, the labor market performance is mixed - the unemployment rate ended the year at the same reading as at the beginning, while the annual growth in employment and hours worked was relatively weak, remaining at around 1%. The three-month moving average of our preferred indicator of labor market tightness continues to trade sideways, suggesting that labor market supply and demand are broadly balanced.

Even so, the decline in the unemployment rate still marginally increases the possibility of a rate hike in February. Whether the Reserve Bank of Australia will raise interest rates in February will ultimately depend on the quarterly inflation data released next. We expect the trimmed average inflation rate in this quarter to be 0.8% quarter-on-quarter, and the forecast risks are basically balanced. If the forecast www.xmtraders.comes true, we expect the Reserve Bank of Australia to keep the cash rate unchanged in February. If inflation rises 0.9% month-on-month, a rate hike will be slightly more likely than no rate hike given the decline in unemployment in December (depending on the details of the Consumer Price Index (CPI)).

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