USD: Jobless growth keeps the Fed boxed in

The dollar has opened 2026 on a firm footing, supported by a resilient US growth backdrop, elevated rate differentials and a lingering geopolitical risk premium. DXY remains inside the broad range established last May, with fiscal expectations also helping to underpin the currency, even as the market looks for a slower and shallower Fed easing profile than in prior cycles.

Under the surface, the labour market is doing less work for the expansion. December payrolls rose just 50k, and 2025 delivered the weakest annual jobs gain since 2003 outside the pandemic period, with payroll growth of 584k. After revisions, the three-month average has slipped fractionally negative, consistent with a workforce that has effectively stalled rather than fallen off a cliff edge.

The mix is increasingly defensive. Hiring is concentrated in healthcare and hospitality, while cyclical areas such as manufacturing, construction and retail continue to shed roles. Openings have fallen to 7.15m, reinforcing a low hire, low fire regime, with unemployment holding around 4.4%.

Wage growth remains sticky at 3.8% y/y, keeping the Fed cautious. The latest guidance implies limited easing through 2026, and markets have leaned towards a prolonged hold with cuts pushed into mid-year. That keeps the macro backdrop supportive for the dollar on carry, even if growth is cooling at the margin.

More recently, USD sentiment has been complicated by renewed scrutiny over Fed independence. Reports that the Department of Justice has served subpoenas tied to the Fed’s headquarters renovation, with threats of criminal proceedings against Chair Powell, triggered a risk wobble and a knee-jerk dollar dip. The immediate policy impact may be limited, but the longer-run credibility implications are more material for the USD risk premium.

GBP: Cable trades the dollar cycle, not the UK story

Sterling has begun the week on stronger footing, largely as a function of softer dollar sentiment linked to the renewed scrutiny of the Fed and questions over political interference. GBP/USD has pushed back into the mid-1.34s, having held technical support around the 200-day moving average in the high 1.33s.

Domestic catalysts are next, starting with monthly UK GDP on Thursday, then a heavier run of labour market, inflation and PMI releases the following week. Those prints should shape expectations into the Bank of England’s February decision. Markets are still pricing fewer than two cuts for 2026, which may prove too cautious if disinflation continues and growth remains subdued. A dovish repricing would re-open downside via the yield channel.

For a more durable sterling bid, investors will likely want a cleaner combination of firmer UK growth and stickier inflation. Without that, the pound’s upside case remains heavily dependent on broader USD weakness.

EUR: Crowded longs leave EUR/USD vulnerable to data surprises

EUR/USD entered the year with positioning stretched, leaving the pair more exposed to profit taking when US data fail to validate near-term Fed cuts. Mixed US releases last week did not create urgency for easing, keeping the euro on the back foot despite a bounce off 1.1625 support.

This week is largely about US CPI. Expectations are for a firmer print, partly reflecting payback from an unusually soft November reading that may have been distorted by shutdown-related measurement effects. Even so, momentum indicators are already stretched, and with January cut odds still low, follow-through downside may be harder to sustain without a clear inflation upside shock.

The rebound towards 1.1680 looks consistent with short-term oversold conditions and the latest bout of Fed independence concerns weighing on the dollar, rather than a fresh euro-positive impulse.

Looking ahead

• US CPI, with the 2025 y/y rate expected around 2.7%.

• UK monthly GDP, then a heavier UK run next week covering labour, inflation and PMIs ahead of the BoE February meeting.

• Supreme Court decision on IEEPA tariffs, with the administration signalling alternative routes via Section 232/301 if required.

• Powell’s term expiry remains a key medium-term risk marker for rates and USD sentiment.