The dollar ended last week on a strong note, setting the stage for what could be a tumultuous week in the capital markets. Market participants should brace for significant developments, particularly as Trump's inauguration takes place on Monday, coinciding with a closure of US markets. The new administration has indicated readiness to take immediate action, leaving little room for uncertainty. In the realm of tariffs, several countries have signaled a willingness to retaliate, which could introduce additional volatility. Meanwhile, preliminary January PMI data is expected at the end of the week. Strength in the Philadelphia Fed survey suggests potential upside risks for the US economy, while the eurozone’s flash reading is likely to confirm its composite PMI remains in contraction for the third consecutive month.

Asia-Pacific Markets

The region’s markets remain highly sensitive to movements in US 10-year yields and speculation surrounding the Bank of Japan's (BOJ) policy trajectory. Barring any major disruptions, the BOJ is widely expected to implement a 25-basis-point rate hike at its January 25 meeting. A decline in US 10-year yields combined with heightened expectations of a BOJ rate hike drove the dollar down to around JPY155 by the end of last week, a correction from the nearly JPY159 level seen after US jobs data on January 10. However, the dollar rebounded to near the previous session’s high ahead of the weekend, reflecting ongoing market volatility.

European Markets

The euro faces pressure from weak growth signals, political instability, and expectations of significant European Central Bank (ECB) easing in the first half of 2025, with the deposit rate potentially being cut by at least 75 basis points. Europe appears ill-equipped to address mounting challenges, including the threat of US tariffs and internal economic difficulties highlighted in Draghi’s recent report. Two key data releases this week will shape market sentiment: Germany’s ZEW survey on January 21 and the preliminary January PMI at week’s end. While the euro stabilized after hitting a low of $1.0180 early last week—its weakest level since November 2022—the recovery remains tenuous.

American Markets

The US dollar continues to benefit from the relative outperformance of the US economy, reducing pressure on the Federal Reserve to ease monetary policy. The week begins with Trump’s inauguration and the Martin Luther King holiday, followed by a robust economic calendar featuring preliminary January PMI data, several regional Fed surveys, and existing home sales figures.
The Dollar Index has rallied approximately 10% from late September lows, peaking on January 13. Recent consolidation suggests a constructive trend, with Friday’s close marking the highest settlement in four sessions, reinforcing the greenback’s position as a market leader.
In summary, this week promises significant developments across major markets. Political shifts in the US, central bank decisions in Japan, and economic data from Europe and America will collectively shape the narrative. Market participants should remain vigilant and prepared for heightened volatility.