FX Daily: Not trusting the dollar sell-off in Daily Currencies Ratings 21/01/2026 USD: Stabilisation can help the dollar recover Yesterday’s dollar sell-off seemed to reflect a combination of spillover from JGB volatility and concerns about Europeans reducing their Treasury holdings. The volatility imported from Japanese bonds affected global fixed income across the board, but the FX reaction was not uniform. Higher bond yields – even when driven by foreign markets – tend to weigh on a currency when investors are already sensitive to that country’s fiscal sustainability. Over the past year, the three developed market currencies that have at times shown a negative correlation with their long‑dated yields (10Y–30Y) have been USD, GBP and JPY – the three worst-performing G10 currencies yesterday. To us, it was particularly striking how GBP underperformed even against high‑beta currencies such as NOK and NZD, which suggests that the fiscal factor is a bigger discriminator of FX moves than risk sentiment. Our view is, however, that this is not a sell-off worth chasing in USD. Long-dated Japanese bonds rebounded sharply overnight, lifting one source of USD downside risk for today’s European-US session. Incidentally, S&P500 futures are up 0.4% while European equities seem to be struggling to recover. Greenland will be the dominant theme today and there may be scope for de-escalation, offering the dollar some support. Trump is meeting EU leaders in Davos today, and if the past year has shown anything, it’s that face‑to‑face engagement tends to provide the best opportunity for tensions with the US president to ease. Before departing for Davos, Trump said: “We’ll probably be able to work something out.” There are no market-moving data releases in the US today. Market pricing for a Fed cut has remained untouched despite the bond and equity sell-off (only 6bp for March) which reinforces our view that the dollar faces upside risks today amid broader stabilisation. Francesco Pesole EUR: Return below 1.1700 possible today A headline about Danish pension fund AkademinerPension exiting US Treasuries yesterday briefly fuelled extra concerns about a European exodus from US assets, despite the actual size of the fund’s holdings being very small in December ($100m). Markets aren’t following through on these concerns this morning, and if Davos brings some geopolitical de-escalation, the associated EUR gains may start to be trimmed today. Our view is that unless bond volatility spikes again – not our baseline – EUR/USD belongs below 1.170 in a seasonally strong period for USD and in light of the recent hawkish repricing of front-end USD yields. In the rest of Europe, we are also wary of chasing the rally in SEK much further for now. EUR/SEK is trading at over 2% short-term undervaluation and may be due to an upward correction – we believe to 10.80 – before re-establishing a medium-term depreciation trend. Francesco Pesole GBP: No surprises in UK inflation As discussed in the USD section, sterling’s underperformance yesterday was, in our view, primarily mirroring the risks of importing bond volatility for a currency that recently experienced periods of negative correlation with back-end yields on fiscal worries. Calmer markets this morning mean EUR/GBP may face some downward pressure and return below 0.870. On the data side, there was nothing in the UK inflation report for December – released this morning – that is likely to move the needle for the February Ba