Weekly FX Outlook: Dollar Weakness Drives G10, Fed Tone Decides Whether It Lasts
Lamera Capital
2026-01-26
Lamera Capital | 26 January 2026
The US dollar has weakened across G10, not because US growth has faltered, but because markets are reassessing policy credibility and the Federal Reserve’s path. Sterling and the euro have benefited by default. This week’s Fed meeting is the key test, determining whether recent moves extend or consolidate.
The US dollar has weakened across G10, not because US growth has faltered, but because markets are reassessing policy credibility and the Federal Reserve’s path. Sterling and the euro have benefited by default. This week’s Fed meeting is the key test, determining whether recent moves extend or consolidate.
Foreign exchange markets begin the week with a clear driver. The US dollar has weakened sharply across G10, lifting both the euro and sterling.
This weekly FX outlook focuses on US dollar weakness, G10 currency movements, and how Federal Reserve policy expectations are shaping exchange rates.
Importantly, the move is not being driven by a collapse in US economic data. Growth remains resilient and the labour market is cooling gradually, not breaking. Instead, markets are pricing a growing credibility risk around US policy, alongside uncertainty over the timing and pace of interest rate cuts.
Investors are increasingly hedging US exposure by selling dollars rather than rotating into traditional safe havens. That behaviour explains the scale and breadth of last week’s move.
The question now is simple. Does the Federal Reserve validate this repricing, or push back against it?
USD Outlook: Federal Reserve Policy Sets the Direction
US fundamentals alone do not justify the recent scale of dollar weakness. Inflation is easing, but remains sticky. Labour data continues to point to resilience rather than stress.
The dollar is weaker because markets are focused on policy confidence, political interference risks, and uncertainty around future rate decisions.
The Federal Reserve meeting on Wednesday is the single most important event of the week. Rates are expected to be held. What matters is Chair Powell’s tone.
Markets will be listening for:
- Whether the Fed is comfortable with current pricing for rate cuts later this year
- Any pushback against expectations for spring or early-summer easing
- How the Fed balances labour market cooling against inflation persistence
A patient, non-committal message would allow dollar weakness to persist. A firmer pushback on cuts could trigger a short-term rebound. Either way, volatility around the press conference is likely.
The dollar remains vulnerable, but further weakness now requires confirmation from the Fed.
GBP: Supported, but Trading Relatively
Sterling has recovered convincingly after UK PMI and retail sales data surprised positively. Markets have placed greater weight on fresh survey data than on backward-looking official statistics, improving confidence in near-term momentum.
This has stabilised sterling and supported gains against both the euro and the dollar. However, there are no major UK data releases this week, and the Bank of England outlook remains uncertain.
As a result, sterling is trading as a relative currency. It benefits when the dollar weakens and holds ground when the euro lacks conviction. Without new domestic catalysts, further gains are vulnerable to consolidation rather than extension.
Sterling strength is justified, but it is not fully in control of its own direction.
EUR: Stability, Not Optimism
Eurozone growth remains modest and uneven. Germany shows tentative improvement, while France continues to underperform. That picture has not materially changed.
What has changed is the policy comparison with the US. ECB rate expectations remain stable, while the Fed’s path is increasingly questioned.
This week, ECB speakers will shape expectations more than data. Friday’s flash inflation and GDP releases matter primarily for confirmation. A sharp downside surprise in inflation could pressure the euro. Absent that, EUR remains supported by relative policy stability and ongoing USD weakness.
The euro is not rallying on strong growth. It is holding ground because uncertainty elsewhere is greater.
G10 Snapshot
- AUD: Strong domestic data and sticky inflation keep it supported. CPI on Wednesday is key for near-term direction.
- JPY: Intervention risk remains live. USD/JPY is sensitive to policy signalling and headlines.
- CAD: Stable, but guidance from the Bank of Canada matters more than the decision itself.
- CHF: Being used as a hedge against uncertainty, not as a panic asset.
What Finance Directors Should Take From This
This is not a risk-off market. Moves are being driven by policy confidence, not fear.
Dollar weakness has improved conversion opportunities, but timing risk is rising ahead of the Fed. Short-term consolidation is increasingly likely even if the broader trend remains intact.
The right approach this week is structured execution, phased decision-making, and avoiding the temptation to chase spot moves.
The move has happened.
The Federal Reserve decides whether it lasts.
The Federal Reserve decides whether it lasts.