GBP: Politics and a dovish BoE reprice the near-term

Sterling has started the week on the back foot, with politics and last Thursday’s softer Bank of England signal forcing a rethink of the near-term outlook. GBP/USD has slipped under $1.36 and is testing its 21-day moving average, with a support band into the mid-$1.33s that may slow, but not necessarily stop, any further drift lower.

The political premium has grown after the weekend resignation of Morgan McSweeney as the Prime Minister’s Chief of Staff, linked to the fallout from the Mandelson–Epstein affair. While intended to insulate Keir Starmer, the market read is that this rarely draws a line under the issue, and the leadership backdrop now looks less stable.

The immediate concern is a policy shift towards a more left-leaning stance to consolidate Labour support. That would likely revive investor unease around the UK fiscal trajectory and debt dynamics. The gilt curve is already reflecting this, with term premia creeping higher and long-end yields proving reluctant to fall even as the front end rallies.

For FX, the mix is uncomfortable. A more dovish vote split at the BoE has diluted sterling’s rate support, while politics adds an additional risk premium that investors are not rushing to fade. For GBP/EUR, the broader post-November uptrend is still technically intact, but momentum has softened. The next level to watch is €1.1457, the 100-day moving average, where a decisive break would suggest a deeper corrective phase.

USD: A busy data run tests the Dollar rebound

US data continue to point to a two-speed economy. Activity indicators suggest stabilisation, with services holding up and manufacturing back in expansion territory, while labour market signals look softer, including weaker private payroll growth and a lower level of job openings. That pattern fits a split backdrop where higher-income demand and AI-related investment remain supportive, while more trade-exposed segments face tighter hiring and tariff-linked price pressures.

Fed messaging remains consistent with policy patience, but with greater sensitivity to labour risks at the margin. The broad takeaway is that near-term inflation prints still carry the most weight for pricing the next move, with officials signalling a willingness to wait for clearer evidence before easing further.

This week’s US calendar is the key driver for the Dollar’s near-term direction. Retail sales, payrolls and CPI arrive in quick succession, and January inflation can be seasonally firm as pricing resets occur early in the year. Separately, annual benchmark revisions alongside the jobs report raise the risk of negative revisions to prior payroll months, which could skew the market’s initial read of the labour picture.

EUR: Fair value reasserts, with the US side still the swing factor

EUR/USD softened into the weekly close as the market pared back a sentiment-led euro long built during the earlier USD pullback. The pair still sits close to the 1.18 area, but is trading nearer a drifting fair value anchor around the upper 1.17s as the US macro story remains mixed rather than decisively supportive of the Dollar.

Reports that Chinese regulators have advised domestic institutions to curb US Treasury exposure on volatility concerns have provided some near-term support to EUR/USD sentiment. In Europe, the ECB delivered the expected hold, and President Lagarde’s neutral tone reinforced a wait-and-see stance, with limited emphasis on currency-driven disinflation risks.

That keeps the focus on the US leg of the rate differential. The upcoming US jobs and inflation releases should do most of the work in setting direction. A firm upside surprise would likely pull EUR/USD back below 1.18 as differentials move back in the Dollar’s favour, while softer outcomes could have an outsized impact given how much hawkishness is already embedded in market pricing.

Looking ahead

• UK politics remains a live input into sterling risk premia, particularly through the long end of the gilt curve.

• GBP/USD: watch $1.36 and the 21-day moving average near-term, then support into the mid-$1.33s.

• GBP/EUR: €1.1457 (100-day moving average) is the key near-term marker for trend integrity.

• US calendar focus: retail sales (Tue 10 Feb), payrolls with benchmark revisions (Wed 11 Feb), CPI (Fri 13 Feb).

• EUR/USD: direction hinges on whether US data validate a resilient growth and sticky inflation mix, or re-open easing expectations.