Weekly Market Outlook | 5 – 9 Jan 2026

The first full trading week of 2026 marks a re-engagement phase for global financial markets as investors return from year-end holidays and liquidity conditions normalise. With trading volumes recovering, markets are expected to respond more decisively to incoming macroeconomic data, particularly from the United States. Investor focus centres on labour-market strength, inflation dynamics, and how early-year data may influence monetary-policy expectations for 2026.

Markets enter the week digesting late-December signals from central banks while reassessing growth prospects across major economies. Attention remains firmly on the Federal Reserve’s policy outlook, global inflation trajectories, and currency volatility driven by policy divergence. Equity markets begin the year cautiously, while commodities continue to reflect geopolitical risks and supply-side uncertainties.

Recent market behaviour suggests a shift away from year-end consolidation toward selective risk engagement. The U.S. dollar has shown early signs of stabilisation, equity indices are attempting to establish direction after thin holiday trading, and energy markets remain supported by persistent geopolitical concerns.

Key Points to Watch

• Liquidity conditions continue to normalise after the holiday period, increasing the likelihood of more pronounced and data-driven market moves across FX, commodities, and indices.
• Markets closely monitor U.S. labour-market data, particularly the December Nonfarm Payrolls report, as a key determinant of growth momentum and monetary-policy expectations for early 2026.
• Expectations around the pace and timing of U.S. policy easing remain fluid, with investors sensitive to any data that challenges the Federal Reserve’s cautious stance.
• Japan remains a focal point in FX markets, as yield differentials and speculation around further Bank of Japan policy adjustments continue to influence yen dynamics.
• Oil prices remain sensitive to Venezuela-related supply risks, as renewed U.S. enforcement actions and geopolitical uncertainty sustain risk premiums and keep energy-driven inflation expectations in focus heading into early 2026.

Fed Outlook, Data Repricing, and Early-Year Positioning

Although no Federal Reserve meeting is scheduled during the week, investor attention remains anchored to how early-year economic data may reshape the policy outlook for 2026. Recent Fed communications have emphasised data dependency, reinforcing a cautious approach to easing while monitoring inflation persistence and labour-market resilience.

The December U.S. employment report represents the first major macro test of the year. A resilient labour market could reinforce expectations of a slower easing cycle, while signs of cooling may revive rate-cut optimism. As a result, FX and rates markets are likely to see heightened sensitivity around Friday’s data release.

With positioning being rebuilt after year-end rebalancing, price action during the week is expected to be driven increasingly by fundamentals rather than technical holiday flows. The U.S. dollar’s near-term direction will likely hinge on whether data confirms relative U.S. economic strength.

Europe and UK: Fragile Growth Meets Normalising Liquidity

European markets begin 2026 against a backdrop of subdued growth expectations. Recent PMI readings and industrial indicators have highlighted ongoing pressure from high financing costs and weak external demand. While some stabilisation signals are emerging, confidence remains fragile.

In the UK, sterling continues to respond to shifting expectations around fiscal sustainability and the Bank of England’s medium-term policy path. With liquidity returning, GBP crosses may experience sharper reactions to data surprises or changes in global risk sentiment.

Investors remain cautious on European assets, with growth uncertainty leaving sentiment vulnerable despite improving liquidity conditions.

Japan and FX Markets: Yield Differentials Drive Yen Sensitivity

Japan continues to exert a significant influence on global FX dynamics. Elevated Japanese government-bond yields sustain speculation that the Bank of Japan may continue adjusting its policy framework in 2026.

The yen remains highly sensitive to yield differentials and shifts in global risk appetite. With liquidity normalising, any sharp moves in USD-JPY could trigger broader adjustments across carry trades and regional equity markets. FX markets should therefore be monitored closely as volatility risks increase.

Commodities and Geopolitics: Oil Remains a Key Inflation Variable

Oil prices remain supported at the start of the year as geopolitical risks intensify across key producing regions. Market focus has increasingly turned to Venezuela-related developments, following renewed U.S. enforcement actions and heightened political uncertainty surrounding the country’s oil exports. These factors have reintroduced supply-side risk premiums into crude markets at a time when global spare capacity remains limited.

While mixed global growth signals may cap demand-side upside, geopolitical supply risks, including potential disruptions linked to Venezuela, continue to underpin oil prices, reinforcing inflation asymmetry into early 2026. This dynamic complicates the outlook for central banks, as elevated energy prices remain a potential upside risk to inflation, influencing broader commodity pricing and cross-asset sentiment.

Global Themes and Risk Drivers

Monetary-policy divergence remains a dominant theme, particularly between the United States and Japan, while FX volatility is expected to rise as liquidity normalises. Inflation risks remain asymmetrical, with energy prices acting as a potential upside catalyst. Geopolitical developments continue to influence commodities and broader risk sentiment, while early-year portfolio repositioning is likely to shape short-term price action across asset classes.

Conclusion

Markets enter the 5–9 January period with improving liquidity and heightened sensitivity to macroeconomic data. While major policy decisions are not scheduled, the interpretation of early-year indicators, particularly U.S. labour-market data, will play a critical role in shaping expectations for 2026.

In an environment defined by policy uncertainty, geopolitical risks, and renewed participation, disciplined positioning, cautious leverage, and active risk management remain essential. Investors should be prepared for increased volatility driven by data repricing as markets establish direction for the year ahead.