Forex Market Forecast for January 2026

Key Points

Federal Reserve Rate Decision (January 28): Following the 25 basis point cut in December, the Fed is expected to keep interest rates steady at 3.75% in January. The market will be looking for guidance on the path ahead.
Bank of Japan Rate Decision (Jan. 23): The BoJ delivers its first policy decision of 2026 with no expectation of an immediate hike. ING notes that further tightening is likely in the second half of the year unless yen weakness forces an earlier move.
Systematic USD Selling: Bank of America notes that systematic investors (CTAs) are continuing to sell the US dollar amid weakening price trends, favoring a rotation into the GBP, AUD, and CAD.

US Dollar (USD)

The US dollar begins January on a mixed footing. The DXY has been stabilising as investors assess a packed US data calendar. According to the calendar, January will bring no major monetary policy decisions, leaving data as the primary market driver.

The Fed’s Jan. 28 meeting will be an anchor for FX trading this month. The rate is expected to remain at 3.75%, with Powell’s tone likely determining whether markets pull forward expectations for mid-year rate cuts. Key labour data will also shape sentiment.

In a recent note to clients, Bank of America stated that the US dollar finished the week lower, with CTAs continuing to sell the currency based on weaker trends. The bank expects a continued rotation into other major currencies.

Key Levels

EUR/USD: Higher – 1.1920, Lower – 1.1500
GBP/USD: Higher – 1.3725, Lower – 1.3240
USD/JPY: Higher – 158.00, Lower – 154.50

Euro (EUR)

The euro enters January with EUR/USD trading near 1.1719, up 0.4% over the past month. The focus now shifts to Eurozone data rather than policy events, as no ECB meeting is scheduled this month.

ING recently warned that the euro remains sensitive to inflation forecast revisions, with past CPI downgrades generating EUR/USD pullbacks. This month’s reading (est. 2.1% y/y) could become a catalyst for whether the pair extends or retraces its late-December strength.

In its December note, ING also stated that a brief sell-off in the EUR/USD could see the pair fall to a low of around 1.1680/1700.

Key Levels

EUR/USD: Higher – 1.1920, Lower – 1.1500
EUR/GBP: Higher – 0.8890, Lower – 0.8640

British Pound (GBP)

Sterling began January on a mixed footing, rising to 1.35 before pulling back. However, the GBP/USD has risen 0.8% over the past month to 1.3457.

After December’s widely expected Bank of England rate cut to 3.75%, attention turns to how markets digest further easing expectations.

ING noted in mid-December that speculative positioning remains heavily short sterling, which may limit downside follow-through even in the face of dovish policy. They also expected further BoE cuts in February and April, compared with market pricing of only one cut over that period.

ING also previously suggested EUR/GBP could spike toward 0.8820 before retreating if the ECB tone softens.

Key Levels

GBP/USD: Higher – 1.3725, Lower – 1.3240
EUR/GBP: Higher – 0.8890, Lower – 0.8640

Japanese Yen (JPY)

The yen starts the year under renewed pressure, with USD/JPY at 156.80, up 1% in the past month and price looking to push past the 158.00 level.

The January 23 BoJ decision is the key event, though ING analysts stressed in a December 19 note that no hike is expected this early.

Instead, markets are focused on the timing of the next move after December’s 25 bp hike to 0.75%.

ING stated that Governor Ueda struck a cautious tone last month, emphasising the need to study the effect of higher rates before acting again. Markets had expected more explicit guidance, and the lack of clarity pushed USD/JPY higher in late December.

ING added that above the 158 level, intervention risks rise, the same zone where Japan intervened in 2024.

The base case from ING is for a second BoJ hike in October 2026, though renewed yen weakness could bring that forward to the second quarter.