GBP: sterling bid, but the macro drag remains

Sterling has started 2026 strongly, outperforming most majors. GBP/USD has cleared $1.35 to a three-month high, while GBP/EUR has snapped out of its recent range to print its firmest level since early September.

Part of the move reflects a modest repricing of the Bank of England path, with fewer cuts priced than in December. The rally has also tracked a rotation in global equities, with the Venezuela headlines favouring cyclicals and defence, supporting UK risk and lifting the FTSE 250 to its best level since 2022.

We would be cautious on durability. Disinflation remains the core domestic story and the BoE still looks set to deliver further easing this year, leaving policy as an ongoing headwind once the risk bid cools.

Technically, GBP/EUR is now testing 1.1560, broadly aligned with the 200-day EMA. That zone is a meaningful hurdle. Failure to hold above it would leave the cross exposed to a renewed leg lower, particularly given the light UK data calendar in the near term. The next clear domestic catalysts are UK GDP next week, then labour market, inflation and PMI prints the following week, which will shape expectations for a potential February BoE cut.

USD: geopolitics supports the dollar, data takes over next

The dollar regained traction on a pickup in geopolitical risk tied to Greenland, prompting a familiar safety bid. Earlier gains had faded as Venezuela’s power shift lowered perceived near-term risk of direct US escalation, but the tone firmed again once European leaders backed Denmark and Washington’s rhetoric intensified around Greenland’s strategic importance and defence.

Markets may also be reading the Venezuela development, plus firmer US positioning, as supportive of expectations for additional oil supply and broader US “macro leadership”. That creates a second support channel for the dollar alongside risk aversion.

The near-term focus now rotates to US data. ADP, JOLTS and ISM services are due today, with payrolls on Friday. The unemployment rate is likely to do more of the market’s work than usual, given the sensitivity of labour supply assumptions to the new administration’s immigration stance.

On the charts, DXY appears to have stabilised around 98.200. A push back toward Monday’s 98.861 is plausible if today’s releases beat expectations. A sustained move into the 99 handle probably needs a convincing jobs report.

EUR: early weakness, with spreads increasingly in control

The euro has started the year on the defensive, slipping against both USD and GBP after finishing 2025 strongly. The initial move reflects a rapid re-pricing for a more uncertain US policy backdrop and a higher geopolitical risk premium, with positioning adjusting quickly into January.

The pre-year consensus leaned towards further EUR strength, supported by German fiscal impulse and the idea of narrowing rate differentials as the Fed moved towards cuts while the ECB looked close to done. That narrative is already being tested. Another ECB cut cannot be ruled out, particularly if today’s euro-area inflation undershoots, while the bigger swing factor for EUR/USD is increasingly the US side of the equation. If US growth holds up or Fed pricing shifts less dovish, spreads can stay wide and keep EUR/USD capped.

Rates are doing more of the heavy lifting than sentiment. The relationship between EUR/USD and front-end US–German yield differentials has tightened materially, reinforcing that monetary divergence, rather than risk tone, is likely to steer the pair through 2026.

From a technical angle, sustained trade below the 50- and 100-day moving averages would increase downside momentum and bring the 200-day moving average into view, around the mid-$1.15 area over the coming weeks.

Looking ahead

• UK: GDP next week, then labour market, CPI and PMIs the following week to frame February BoE risk.

• US: ADP, JOLTS and ISM services today, then NFP on Friday, with the unemployment rate a key market input.

• EZ: Today’s inflation print is the near-term test for residual ECB easing risk.

• Levels to watch: GBP/EUR 1.1560 (200-day EMA area), DXY 98.200 support / 98.861 near-term resistance, EUR/USD MAs and the 200-day in the mid-$1.15s.