The Euro has surged to the low-1.20s, reaching multi-year highs after fully reversing its late-2025 decline, as investors grow uneasy over unpredictable US policy and increasingly view euro assets as a safer, liquid alternative to unhedged dollar exposure—helped by signals from Trump that appear tolerant of a weaker dollar. However, with the Fed decision due and EURUSD now above 1.20, upside momentum may face resistance, especially as the ECB has warned that excessive euro strength could hurt exports and inflation, potentially reviving expectations for rate cuts despite policymakers saying rates are currently in a “good place.”

USDJPY rebounded modestly to around 152.75 after a sharp 4% slide, but the broader tone remains fragile as intervention risks, policy coordination talk, and technical damage continue to cap rallies. In Japan, improving inflation and wage expectations are fueling speculation that major pension funds could modestly shift back into JGBs, supporting a potential “repatriation” theme for both bonds and the yen, though any large reallocation looks unlikely. Still, wide rate differentials keep the yen under pressure, while a break below key technical levels leaves USDJPY biased lower, with joint U.S.–Japan intervention potentially opening the door toward 145–150. Near term, attention turns to the 40-year JGB auction, while stronger global growth could revive dollar carry demand and complicate the outlook.

The Aussie dollar has slipped after briefly hitting a near three-year high on strong December CPI data, which lifted expectations for an RBA rate hike. Markets now see roughly a 70% chance of a 25bp hike in February, up from 55% earlier this week, and any pullbacks are likely to attract buyers. External conditions also favor the AUD, with US political uncertainty weighing on the dollar, while improving Chinese industrial profits and solid Australian business confidence reinforce the case for a hawkish RBA and provide ongoing support for the currency.