As 2026 gets underway, major FX pairs are reflecting a familiar but nuanced theme: relative U.S. dollar strength driven less by outright USD dominance and more by continued weakness in key counterparts—most notably the Japanese yen and the euro. Monetary policy divergence, yield differentials, and uneven economic momentum remain the primary forces shaping price action.
Dollar vs Japanese Yen: Yen Weakness Still Doing the Heavy Lifting
USD/JPY remains elevated, trading in the 156–157 range, close to recent cycle highs. The pair’s resilience is best understood as persistent yen softness rather than a broad-based dollar surge.
Key drivers include:
- Bank of Japan caution: While the BoJ has taken tentative steps toward normalization, markets remain unconvinced about the pace and durability of tightening. Policy clarity is still lacking, leaving the yen structurally vulnerable.
- Yield differentials: U.S. Treasury yields remain meaningfully higher than Japanese government bond yields, sustaining capital flows into USD-denominated assets.
- Low liquidity effects: Early-year trading conditions have exaggerated moves, allowing USD/JPY to stay buoyant despite expectations of eventual Fed easing later in 2026.
Technical context
- Resistance: 157.70, then 158.60–159.25
- Support: 156.30, followed by 155.55
The pair remains in a rising channel, but upside momentum is increasingly fragile without fresh catalysts.
EUR/USD: Euro Weakness Pressures the Pair Lower
EUR/USD has softened into the 1.16–1.17 zone, reflecting renewed euro vulnerability rather than a decisive dollar breakout.
Contributing factors:
- Disappointing eurozone data: Downward revisions in manufacturing activity and sluggish growth signals continue to weigh on sentiment.
- ECB restraint: With the European Central Bank firmly data-dependent and offering no hawkish surprises, rate expectations remain capped.
- Relative yield support for USD: Even modest firmness in U.S. yields has been enough to tilt flows away from the euro.
The euro’s broader trend remains conditional—sustained upside would likely require clearer evidence of economic stabilization and stronger regional growth momentum.
What’s Driving Major FX Pairs Right Now
Policy divergence still matters
- The Federal Reserve is expected to pivot gradually toward easing later in 2026, but markets have not fully priced aggressive cuts.
- The ECB’s cautious stance limits euro upside, while the BoJ’s slow normalization keeps pressure on the yen.
Macro imbalance
- The U.S. economy continues to outperform Europe and Japan on a relative basis, reinforcing capital flow asymmetries.
Positioning adjustments
- After a broadly weak dollar narrative in 2025, early-2026 price action reflects rebalancing rather than conviction-driven USD buying.
What Traders Are Watching Next
Key data
- U.S. labor market releases, particularly employment and wage data, will heavily influence near-term dollar direction.
Central bank communication
- Any shift in tone from the Fed, ECB, or BoJ could quickly recalibrate FX ranges.
Technical inflection points
- USD/JPY: Sustained trading above 157.70 would signal renewed upside risk.
- EUR/USD: Holding above 1.17 is critical to avoid a deeper corrective move.
Practical Takeaways
- USD/JPY strength remains yen-driven, not purely USD-led—range trading conditions still dominate.
- EUR/USD weakness reflects macro underperformance, not a collapse in euro fundamentals.
- Directional conviction will likely emerge only after clear data or policy surprises.
MarketMind Insight – In FX, relative weakness often tells the real story. Today’s “dollar strength” narrative is less about USD resurgence and more about lingering fragility in the yen and the euro. Until policy clarity improves, expect ranges to matter more than headlines.
