The euro eased after the prior session’s rally, but remains supported by a sharp jump in Germany’s ZEW expectations index to its highest level since mid-2021, reflecting optimism around large fiscal programs and the view that 2026 could mark a turning point for Europe’s economy. ECB officials signaled rates are likely to stay on hold with a mild easing bias, helping limit EUR downside, while Trump’s tariff threats and clashes with Europe have unsettled markets and raised longer-term risks for the dollar, highlighted by a Danish pension fund’s decision to exit its US Treasury holdings over policy concerns.

The yen is holding relatively steady despite a difficult domestic backdrop marked by fiscal worries and election uncertainty. While weak fundamentals and politics continue to weigh on the currency, sharply rising JGB yields, growing expectations for BOJ rate hikes and the risk of FX intervention near 160 are making further dollar gains increasingly asymmetric over the next couple of weeks. Markets expect the BOJ to hold rates at its 23 January meeting, but with officials paying closer attention to yen weakness and inflation, any move through 160 could prompt either a policy shift or direct intervention, keeping volatility high.

The Aussie dollar dipped slightly after retesting recent highs, as markets look ahead to Thursday’s labor data and a genuinely “live” February RBA meeting. Investors are pricing the most aggressive tightening path in G10 for 2026, contrasting with expected Fed cuts and underpinning AUD support, while domestic data point to resilient demand and still-elevated inflation. Bank forecasts are split on a February hike, and positioning shows specs remain net short but have covered sharply since November, suggesting consolidation ahead as traders wait for fresh catalysts.