USD: Growth push versus credibility risk

Richmond Fed President Tom Barkin cut straight to the point last week, arguing the US economy is effectively driven by two forces: AI and high-income households. That imbalance sits behind a more assertive policy pivot in Washington as the midterm cycle approaches. The administration has moved from rhetoric to measures that look designed to broaden the rally: tweaks to defence-sector buyback rules, discussion of credit card rate caps, and curbs on corporate ownership of residential property.

This forms the tactical layer of Treasury Secretary Scott Bessent’s “3-3-3” framework: 3% growth, a 3% deficit, and an extra 3 million barrels of oil per day. The bet is that a hotter economy, looser regulation and a more private-sector tilt can generate enough momentum to stabilise the debt trajectory. The risk is obvious: pushing for lift-off while keeping fiscal confidence intact is a narrow path. Execution matters, and the margin for error is small.

Markets are not taking this as a free lunch. The dollar still screens well versus other major fiat, but the more telling message is the parallel bid for hard assets. Gold and other havens continue to grind higher, reflecting a rising “trust discount” being applied to institutional stability. Investors appear less focused on near-term inflation hedging and more on policy uncertainty, particularly around public disputes, geopolitical brinkmanship and renewed sensitivity around central bank independence.

At the same time, rates markets are quietly signalling a different baseline: US exceptionalism remains the consensus until proven otherwise. Even politically noisy headlines have not translated into an immediate long-end tantrum, suggesting investors still see the bond market as the ultimate constraint. The logic is simple: policymakers cannot tolerate an uncontrolled rise in funding costs without damaging housing and activity. In effect, the rates market remains the guardrail that keeps USD supported through the headlines, even as gold prices show that confidence is not unlimited.

EUR: Small moves, big signal

EUR/USD posted its strongest daily rise in over a month on Monday, even though the move itself was only around half a percent. The reaction looks exaggerated largely because volatility has been unusually suppressed: when the baseline is quiet, even modest shifts print as “large” on the tape.

The timing matters. Trade friction is back in focus, with renewed tariff threats against European partners and a predictable EU response. The 2025 playbook still resonates: tariff escalation tends to pressure the dollar and provide EUR/USD upside as positioning rotates into a broader “sell America” narrative. Europe may now be the direct target, but the market reflex remains similar.

The constraint for the euro is structural. Europe remains more reliant on exporting to the US than vice versa, limiting the credibility of an all-out retaliation strategy. Any broad-based tariff response risks inflicting more pain at home than in Washington. Energy dependence also remains a strategic vulnerability in a world where leverage is increasingly transactional. The euro can benefit tactically from risk sentiment swings, but the macro bargaining power remains asymmetric.

GBP: Labour softens, but the spotlight stays offshore

This morning’s UK labour-market release reinforced the gradual cooling trend. Pay growth eased slightly, private-sector wage momentum undershot expectations, unemployment held at a multi-year high, and payrolls continued to contract, with job losses larger than forecast. The overall message is consistent: slack is building and the domestic backdrop is softening.

Sterling’s immediate response was limited. The market remains dominated by US-centric geopolitical and policy headlines, while a cautious and divided MPC dampens the usual sensitivity to UK data prints. The softening labour narrative is also well understood and already reflected in a measured easing profile priced into 2026.

Near-term attention now shifts to tomorrow’s inflation release. With headline CPI expected to step down materially into the spring, a clearer downside surprise would carry more weight for GBP than today’s labour figures. Inflation remains the key constraint on how quickly the BoE can lean dovish, so the next print is the more likely catalyst.

Looking ahead

• US: Watch for policy headlines that test the institutional risk premium (Fed independence rhetoric, fiscal signals, and any shift in long-end pricing).

• Europe: Tariff messaging remains the key driver for EUR/USD direction in the near term, especially given suppressed volatility.

• UK: Inflation tomorrow is the focal point for GBP, with a downside miss the clearest route to repricing BoE expectations.