USD: Dollar steadies as risk wobbles

Risk markets have had another bruising week. US equities remain heavy, with tech still doing most of the damage after a fresh wave of AI capex angst. Metals and crypto also saw violent swings, followed by a sharp, synchronised rebound that looks more like positioning relief than a fundamental reset.

For the dollar, that mix usually delivers near-term support via defensive flows. However, the upside in broad USD looks capped if the equity drawdown deepens. A US-centred risk shock would likely tighten financial conditions, cool activity and bring forward a more assertive Fed easing path, which tends to work against sustained USD strength. Separately, the longer-running theme of diversification and hedging out of USD exposure remains a background headwind.

US data have tilted softer at the margin. Job cut announcements and jobless claims have moved higher, and private payrolls disappointed, keeping markets comfortable with a June cut and a second move later in the year. Front-end pricing has drifted lower this week, reinforcing the view that policy can ease towards neutral if the labour market loses momentum. Near term, a DXY push towards the high 90s may prove sufficient, with today’s University of Michigan sentiment a potential swing factor for USD if confidence slips again.

GBP: BoE hold, but the messaging turns dovish

The Bank of England held Bank Rate at 3.75%, but the vote split and guidance landed more dovishly than expected. Four members preferred an immediate cut, and the updated projections imply a cleaner disinflation profile into spring. Governor Bailey’s tone suggested greater confidence that further reductions are feasible this year, consistent with a backdrop of slowing growth and a softer labour market.

Rates pricing reacted quickly, lifting the implied probability of a March cut materially. Sterling followed lower, with the repricing in the front end doing most of the work. The curve also steepened as markets leaned into a lower policy path, challenging the recent bullish momentum in GBP, particularly versus the euro where relative rate expectations remain the clearest driver.

Domestic politics added noise, but the core issue for FX remains the policy signal. The next key test is UK CPI on 18 February. Confirmation of easing price pressures would validate the BoE’s stance and keep GBP vulnerable, while any stickiness would force a partial unwind of the dovish repricing.

EUR: ECB stays put and plays down euro strength

The ECB left rates unchanged at its first 2026 meeting and repeated that policy is in a “good place”, with inflation still expected to converge towards 2% over the medium term. The Council acknowledged an uncertain external backdrop, with trade and geopolitics still the main sources of risk to the outlook.

Euro strength was in focus, but the ECB showed little appetite to push back. President Lagarde framed the currency as consistent with the baseline, and prior assumptions around EUR/USD remain broadly consistent with current levels. With EUR/USD off last week’s highs, the immediate pressure for the ECB to reopen a rate-cut debate to lean against the currency looks reduced.

In the near term, market plumbing matters. The recent turbulence in metals has been feeding into EUR/USD via shifting USD sentiment, with correlations unusually elevated versus gold and silver. If metals volatility persists, it risks keeping EUR/USD more reactive to cross-asset swings than to euro-area fundamentals.

Looking ahead

• University of Michigan consumer sentiment: watch for spillover from equity weakness into confidence and USD pricing

• US labour data next week, including NFP benchmark revisions: key for the Fed easing debate

• UK CPI on 18 February: pivotal for validating, or challenging, the BoE’s newly dovish tilt

• Cross-asset volatility: renewed stress in tech, metals or crypto would likely transmit quickly across FX risk proxies