Created on January 06, 2026

Summary

• The US dollar pulled back on Monday as we continue to see a bit of consolidation.

US Dollar vs Japanese Yen

The US dollar did initially rally against the Japanese yen during trading on Monday, but has since fallen in what has been a little bit of lackluster performance by the dollar, more than anything else.

When you look at the technical analysis, this is a market that has been consolidating after a big move to the upside, and the recent pullback of the last couple of weeks makes sense because, at this juncture, it appears to me very obvious that the 158 level is an area that you are going to have to watch closely.

If we can break above 158, then there is a world where we start to see a lot of upward activity. At that juncture, I’m looking at a move to the 160 yen level pretty quickly. That being said, we did pull back during the trading session on Monday, and I think this just reiterates the idea of consolidation between the 158 level on the top and the 154.50 yen level on the bottom.

Interest Rate Differential and Carry Trade Dynamics

The fundamentals for this pair are driven by the carry trade, the interest rate differential, as per usual, as the Federal Reserve currently has a policy between 3.5% and 3.75% after a rate cut in December. Markets expect maybe one more cut in the first quarter, but the rate remains relatively high in comparison to Japan, which only has a 0.75% rate after a hike.

This is a 30-year high. Even with the BOJ hiking and the Federal Reserve cutting, the gap is still roughly 3%. So, investors will more likely than not continue to sell the yen to buy the dollar and pick up the differential. That being said, the US dollar has struggled a bit, so this may not be the first place traders are looking to short the yen by another currency.

That being said, the Bank of Japan is still suggesting that it will raise rates if inflation targets are met. We’ll have to see. The slow and gradual rate hike situation in Tokyo is disappointing for those who are hoping for the yen to recover. The Federal Reserve is easing, but the US economy remains extraordinarily resilient, possibly even boosted by new fiscal spending and government bills mentioned in recent forecasts, preventing a dollar sell-off en masse.

We are getting pretty close to the 160 yen level, relatively speaking. In that scenario, the Japanese have, of course, defended. Geopolitics could drive money back into the yen as well. But all things being equal, I look at this as a bullish but cautious situation. The primary trend is up, fueled by the interest rate differential, but you also probably have somewhat limited upside at 160 yen.

The Bank of Japan has a meeting January 23. Any surprise hike could break this trend, but we’ll just have to see where this is. I remain more buy-on-the-dip here in a short-term back-and-forth type of environment.

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Created on January 06, 2026

The euro went back and forth on Monday, as traders continued to digest the news over the weekend out of Caracas. Risk sentiment is likely to be in flux at best.

EUR/USD

The euro was back and forth during the trading session on Monday as we initially tested the 50-day EMA. I think at this point in time, it is obvious that the buyers are still willing to stick with the euro despite the fact that it has not been able to break above a significant resistance barrier. That resistance barrier is the 1.18 level, which could extend all the way to the 1.19 level. I think it is going to take pretty hefty bullish pressure to finally break above there.

Policy Divergence and Growth Outlook

But there is a little bit of policy divergence here between these two central banks as the Federal Reserve is expected to cut rates further into 2026, and as a result, it is likely that the US dollar will face some pressure there. That being said, the ECB is expected to be less aggressive with its cuts, although cutting is still possible. At this point, the European growth is projected to be modest, somewhere right around 1.2%, but steady and supported by fiscal stimulus in Germany. The United States growth outlook is expected to slow in the beginning part of 2026 but then take off.

All things being equal, I think this is also a market that is trying to determine whether or not inflation is going to be sticky in America. If it is, that is dollar positive. Ultimately, I think this is a situation where traders look at this through the eyes of a consolidation range with more of a buy on the dip mentality. Breaking below the 1.14 level smashes this narrative to pieces, but right now, this has held steady for several months.

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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

Created on January 06, 2026

• The British pound has spent a lot of energy recovering from the initial selloff on Monday. Momentum is still strong here.

GBP/JPY

The British pound has spent most of the day on Monday bouncing from the initial selloff. Initially, when the market woke up, it started to look at the situation in Venezuela, and we did see a little risk-off type of behavior. That has since abated, and it looks like this pair is going to continue to find plenty of momentum. As I write this article, we are near the recent swing high, and there is no reason to think that anything has changed. The market is currently consolidating near its highs, showing no immediate signs of a reversal.

Carry Trade Remains Dominant

This market is defying what some people would think of as the fundamental logic of a strengthening Japanese yen due to the Bank of Japan’s rate hikes. But that being said, it is driven by the carry trade because even if the Bank of Japan starts to raise rates, the Bank of England still offers so much more interest that the carry trade is alive and well.

The market breaking out to the upside could open up a move to the 215 yen level, possibly higher than that. We will just have to wait and see. Just like the market breaking down below the 210 level opens up the possibility of a deeper correction toward the 50-day EMA near the 207 yen level. This is a market that I think will continue to see plenty of buy on the dip type of attitude. I do think there are plenty of people out there willing to take advantage of cheap British pounds in relation to the Japanese yen going forward. I have no interest whatsoever in shorting this pair as the momentum is obviously to the upside.

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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

The EURJPY pair suffered strong negative pressures, reaching below the bullish channel’s support at 183.45 level, to suffer intraday losses by targeting 182.80 level, which forms a key support level to take advantage of its rally towards 183.40.

The confinement between extra support at 182.80 and 183.60 level makes us expect extending the support of the broken bullish channel, to keep the neutrality until confirming the trend by surpassing one of these levels, note that the price rally above 183.60 will reinforce the chances of renewing the bullish attempts, to expect targeting 184.40 barrier, and surpassing it will form next target at 184.90 level in the bullish trading.

The expected trading range for today is between 182.80 and 183.60

Trend forecast: Neutral

Created on January 05, 2026

• Short-term pullbacks are buying opportunities as we wait for value to appear in this pair.

AUDJPY

The Australian dollar spent the first part of the session on Friday rallying against the Japanese yen and even piercing the 105 yen level yet again. That being said, this is a market that continues to see a lot of noise above there, and it should be no surprise that we have, in fact, turned right back around after that move.

All things being equal, this is a market that I still believe in the upside, and it is worth noting that you get paid to hold onto it at the end of every session. We’ve been in an uptrend for a while, and despite the fact that we have flipped the calendar into 2026, I don’t think anything has truly changed.

Market Outlook and Key Support Levels

Short-term pullbacks are buying opportunities as we wait for some type of value. Keep in mind that the Japanese yen is considered to be a safety currency, and the Australian dollar, of course, is considered to be more of a risk-on commodity type of currency.

The 104 yen level should continue to be support and with that being said, I think we have a buy on the dip scenario. The 50-day EMA is all the way down at the 102.26 yen level and rising, so I think that is also dynamic support.

To the upside, if we can finally clear the 105 yen level, it’s likely that we go much higher, perhaps looking to the 107 yen level based on a measured move of the recent consolidation. Keep in mind that the Bank of Japan did recently raise rates, but they can only tighten monetary policy so much as the debt level in Japan is dire, to say the least. With that being the case, I look at this as a market that should continue to pay you over time if you hold it to the long side. I’ve got no interest in getting short, unless of course we get some type of external factor.

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Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

The interest rate differential between the two currencies is negligible at best now, so we’re not even playing along those lines. We’re just trying to figure out whether or not the Bank of England is going to start a larger rate-cutting cycle or not. We already know that the Federal Reserve is likely to cut rates again once or twice, but there are also a lot of questions as to when.

I think you’ve got a lot of concern here playing out, but the British pound has outperformed most of its contemporaries against the US dollar for some time now, be it up or down. It seems to be either stronger or less bad than other currencies, so I expect the dollar to have more of a fight here than it will against other currencies.

EUR/GBP Technical Analysis

The Euro has fallen pretty significantly against the British pound early in the session as we look like we are rolling over at a major resistance barrier. At this point, I think you have to look at this through the prism of a market that is just simply reflecting the reality that the Euro is a lot weaker than the pound against most currencies. So, when you match the two together, this trade makes perfect sense.

We have smashed through a short-term trendline and we’ve smashed through significant support. At this point, I anticipate that this market will continue to go lower, probably down to the 0.86 level initially, and then possibly even lower than that. We’ll just have to wait and see, but this is a pair that I am most certainly interested in shorting, and as a result, I think you have to look at this as an opportunity.

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Created on January 05, 2026

• The British pound rallied a bit on Friday but cannot seem to hang onto gains against the USD.

GBP/USD

The British pound rallied a bit during the early hours on Friday to test the 1.35 level yet again. This is an area that has been important multiple times, and I think it is worth watching very closely.

The market is likely to continue to see a lot of noise in this general vicinity with the possibility of breaking out to the upside. Breaking out to the upside opens up a move to the 1.37 level.

A breakdown from here, breaking below the hammer from the Wednesday session, could open up a test of the 50-day EMA, possibly even the 200-day EMA underneath there. All things being equal, I think this is a market that is trying to find the momentum to break out, but it just can’t seem to get over this 1.35 level.

Market Outlook and Volatility

We will probably make a more profound statement sometime later next week, but in the meantime, I think you have got a lot of choppy short-term back-and-forth trading ahead. I don’t like the idea of getting too heavily involved in the market at the moment, mainly due to the fact that liquidity and volume are still issues, and of course, we don’t really have momentum to deal with.

By the end of next week, though, I do anticipate that we probably have a real shot at some type of movement. I do think that the end of next week, with the jobs numbers coming out of the United States, could give you a little bit of momentum in this pair.

Between now and then, we are probably going to be very jittery and choppy, and with that, I look to short-term charts more as a range-bound trader as it continues to offer short-term opportunities, perhaps on something like the 15.

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