GBP: Political Risk and Policy Nuance

Sterling has edged back above 1.35 against the dollar, largely reflecting softer USD tone rather than domestic drivers. Although GBP/USD has retreated more than 2.5% from its January high at 1.3868, it remains elevated within its three year range.

The broader bearish USD narrative rests on policy uncertainty and the perception of waning US exceptionalism. However, relative growth dynamics still favour the United States, with 2026 forecasts remaining comparatively firm.

At home, Bank of England testimony has subtly reshaped rate expectations. Governor Andrew Bailey reiterated that each meeting will assess whether a cut is warranted, yet stressed insufficient evidence for immediate action. While headline inflation is easing, services inflation remains persistently high. With February inflation data released only after the March meeting, a near term cut appears less certain than markets previously assumed. Any hawkish adjustment may cushion sterling, though softer UK data and fragile risk sentiment limit upside potential.

Political developments add another layer. The Gorton and Denton by election has drawn significant attention. Betting markets currently favour a Green Party victory, but constituency polling points to a close contest. As downside risk has already been priced, a stronger than expected Labour showing could reduce political risk premium and support sterling modestly. Attention will then turn to the May local, Welsh and Scottish elections as the next significant test for the government.

USD: Dollar Consolidates Below Key Resistance

The US dollar index continues to trade beneath its 50-day moving average at 97.940, hovering just under the 98 threshold. The index has not sustainably reclaimed this level since sentiment turned negative in early January. A rebound from the January trough at 95.551, last seen in 2022, has been underpinned by firmer oil prices and a Federal Reserve that appears increasingly comfortable with labour market stabilisation.

Trade policy remains the principal overhang. In his State of the Union address, President Trump reaffirmed his intention to pursue tariffs despite the Supreme Court ruling. The market response has been relatively contained, suggesting investors expect any eventual tariff regime to be less aggressive. However, experience from 2025 showed that the process can be more disruptive for the dollar than the ultimate rate itself. A shift towards narrower or less durable tariff tools risks prolonging uncertainty.

FOMC commentary from Lisa Cook, Austan Goolsbee and Christopher Waller pointed to a growing emphasis on inflation dynamics as labour conditions settle. Rate expectations reflect this shift, with no meaningful easing priced before July. US consumer confidence improved to 91 in February, with January’s decline revised higher, reinforcing a resilient activity backdrop.

Equities remain fragile ahead of Nvidia earnings. A disappointment would likely weigh on high beta currencies, notably AUD, NZD and NOK. The Australian dollar appears particularly extended, with CFTC data showing the largest speculative long position in G10. While Australia’s January CPI surprised modestly to the upside at 3.8%, prompting markets to price a May hike, domestic strength would offer limited insulation in the event of a broader equity correction.

For now, DXY appears anchored within a 97.50 to 98.00 range unless earnings materially shift global risk appetite.

EUR: Range Trade Persists

EUR/USD continues to track close to its 50-day moving average near 1.1774, with trend indicators largely flat and offering little directional conviction. A move back into the 1.15 to 1.18 corridor would be consistent with recent dynamics, though conviction for a sustained break higher remains limited.

Support for the dollar from a firmer Fed stance is offset by residual softness in USD sentiment linked to trade uncertainty. Markets appear reluctant to reprice aggressively until greater clarity emerges on tariff implementation. In the interim, price action just above the 50-day average reflects consolidation rather than accumulation, with investors awaiting a clearer macro catalyst.

Looking ahead

• Nvidia earnings as a catalyst for global risk sentiment

• Further Fed communication shaping July rate expectations

• Developments in US trade policy following the Supreme Court ruling

• UK inflation data and evolving Bank of England guidance

• UK political risk ahead of May regional elections