GBP: Sterling steadies as politics recede

Sterling starts the week with less political noise in the price. After last week’s wave of briefings and internal Labour pressure, the cabinet’s public backing for Prime Minister Keir Starmer has helped take some of the immediate “headline premium” out of the pound. That does not mean political risk has gone away, but it does suggest the market is no longer forced to hedge every fresh rumour in real time.

The options market captures that nuance. GBP EUR risk reversals look noticeably healthier at the very front end, while further out the curve investors still pay up for protection against GBP weakness. In plain terms, traders see the near term political temperature cooling, but they remain wary of flare ups later, so the hedging has shifted rather than disappeared.

Spot is behaving more constructively than the options curve implies. GBP EUR is still holding above the 100 day moving average near 1.1459 and is attempting to re establish itself above the 50 day around 1.1492, which supports the view that pressure is being expressed more through insurance than outright selling. Near term, domestic politics remains a background risk, with this month’s by election and the run up to May’s state election still the key dates on the horizon.

From a macro perspective, the week is about UK inflation and what it implies for the Bank of England’s timing. With headline CPI still around 3.4%, policymakers need ongoing evidence that disinflation is becoming more reliable. Consensus looks for a drop toward 3.0%, and that profile is already well reflected in pricing. A print in line likely validates the current path rather than triggering a fresh wave of GBP selling, while any downside surprise could revive rate cut expectations and weigh on the pound. In GBP USD, the broader driver remains the US side of the equation, but a softer dollar backdrop does leave room for modest sterling upside if UK data does not disappoint.

USD: Conflicting cues limit momentum

The dollar ended last week lower after a choppy mix of equity nerves and mixed signals for Fed policy. The market’s bias still looks asymmetric. Weak or dovish US inputs are rewarded quickly, while stronger data has struggled to generate sustained follow through, which is why rallies have tended to fade.

Even where the data looks firm at first glance, the details have been messy enough to dilute the impact, while broader concerns around US specific risk premia have started to matter more for sentiment than single releases. The result is a dollar that is not behaving like a clean safe haven, particularly when the source of risk is US centred.

On inflation, the latest CPI release encouraged more easing bets, but the composition mattered. The softer headline was helped by energy, while the underlying services story remains stickier than the market would like. Even so, futures pricing continues to lean toward a meaningful easing cycle, with three cuts this year increasingly reflected in market expectations. That keeps the focus on the next confirmation points, rather than the rear view mirror.

EUR: Strong sentiment dominates the narrative

EUR USD continues to trade largely as the mirror image of the dollar. The pair held up well again last week and remains supported by key moving averages, which is consistent with a market that is comfortable owning euros when the dollar lacks conviction.

What is notable is the gap between performance and enthusiasm. EUR USD is not the best performer in G10 year to date, yet sentiment has turned increasingly constructive. Options pricing still shows a premium for euro upside across maturities, and positioning indicators point to investors being more willing to back a sustained euro story than they were late last year.

Fundamentals are more mixed. Euro area activity signals have been soft, and ECB pricing risks still skew toward easier policy if growth momentum fades. That is why this week’s survey data matters. If the upcoming PMI pulse suggests stabilisation is holding, the market’s comfort with EUR USD around the 1.18 to 1.19 area will feel easier to justify. If the surveys disappoint, the euro may hold up on relative USD weakness, but the tension between positioning and fundamentals will become harder to ignore.

Economic events this week

The calendar is heavy and it matters for all three currencies. Tuesday brings the UK labour market report, which will shape the wage and slack narrative into the Bank of England. Wednesday is UK CPI, the main sterling catalyst, and also the release of the FOMC minutes, which will be watched for any pushback on how much easing markets have priced. Friday is the key US data cluster with PCE inflation, alongside growth data, plus the flash PMI releases across the UK, euro area and US, which act as the broader “temperature check” for February and can move EUR and GBP quickly if they surprise.