- Currency futures remain under pressure as risk sentiment deteriorates after the US operation in Venezuela.
- The Dollar Index surges as risk-off flows increase demand for the dollar.
- Yen, AUD, Euro, and Pound futures experience short-term selling pressure.
As fresh geopolitical tension and cautious risk positioning forced flows back into defensive trades, currency futures began the new week with a tilt toward the US dollar. Due to lingering uncertainty surrounding several global flashpoints and demand for safe havens in the wake of the US military action in Venezuela, the Dollar Index futures (DXY) continued to rise, holding close to the 98.60-98.80 range. Even though rate expectations continue to limit the upside for the US dollar, that background set the tone for all major FX futures.
After falling to a nearly 2-week low, Japanese yen futures (6J) saw a slight recovery, but lacked conviction. Although a new policy anchor was established by the Bank of Japan’s December rate hike to 0.75%, markets remain skeptical of the pace of additional tightening. Yield differentials continue to work against the yen due to the lack of a clear timeline for the next move, while inflation is expected to remain contained through 2026. Although intervention speculation has slowed the decline, rallies in 6J are more likely to draw sellers than signal a change in trend, as long as US yields remain high and persistent geopolitical risks persist.
Early in the session, Australian dollar futures (6A) remained under pressure due to conflicting signals from China and a stronger US dollar. Chinese services remain softer, despite a slight improvement in manufacturing activity, as PMI data reminds traders of Australia’s vulnerability to Chinese demand. RBA policy expectations are also improving at the same time. Markets are increasingly pricing in the risk of a February hike, given the Q4 CPI is due later this month, particularly after inflation has remained above target. Instead of a trending move, this policy tension keeps 6A sensitive to incoming data.
As risk appetite decreased, British pound futures (6B) also declined, but losses were limited in comparison to currencies with higher beta. With inflation still above target despite recent cooling, the pound continues to gain from expectations that the Bank of England will only gradually ease. However, given that US payrolls are due later this week, US data will probably have a greater influence on the near-term direction of 6B than UK fundamentals.
As the dollar’s recovery dominated early-week positioning, Euro futures (6E) continued their recent decline, trading close to multi-week lows. The combination of geopolitical uncertainty and cautious Fed pricing has helped the dollar in the short term, despite overall risk sentiment remaining broadly stable.
Futures markets are anticipating a busy data calendar in the future. US ISM manufacturing data, labor market data, and the Friday Nonfarm Payrolls report will significantly influence expectations for the Fed’s next action. Currency futures are likely to continue being influenced by dollar positioning, geopolitical headlines, and selective central bank divergence, rather than general risk-on momentum, until these releases clarify the rate path.