USD: Risk bid returns, but USD still has a near-term tailwind

The post-Venezuela bid for the dollar proved fleeting, with markets quickly rotating back towards macro and risk appetite. Equities absorbed the geopolitical headline with little disruption, and early signs of US engagement with Venezuela’s new leadership have lowered the perceived chance of further near-term military action.

Our take remains neutral to slightly supportive for USD in the near term: risk premia are higher, but there is no clear, immediate transmission to the US outlook or the oil complex. Further out, the balance looks less favourable if the market gains confidence in incremental crude supply and lower oil prices.

Macro has turned a touch softer. December ISM manufacturing slipped below 48, the fourth straight decline and the weakest since October 2024. The backlog component continues to contract at 45.8, consistent with rising inventory risk and a potential drag on employment over coming months. With today’s US diary light and final S&P PMIs unlikely to move markets, attention shifts to ISM services tomorrow and Fed speakers (Barkin and Miran).

Bottom line: even with the safe-haven impulse quickly reversed, we retain a modestly constructive USD bias into January, helped by seasonals and an arguably complacent pricing of geopolitical risk that leaves high-beta FX vulnerable to renewed headlines.

GBP: Sterling extends, but momentum looks stretched versus EUR

GBP/EUR has pushed to its strongest levels since late September, supported by improved risk tone, firm technicals and some reassessment of the Bank of England easing path. The cross cleared key technical levels late last year, and the broader equity backdrop has remained supportive into the start of 2026, helping sterling’s recovery carry through.

Domestic positioning also matters. After a prolonged 2025 drift lower, the post-budget relief rally has encouraged further short covering, amplifying the move. In parallel, UK assets have benefited from a rotation into cyclical and defence-related exposures following the weekend’s geopolitical shift, adding to the bid.

The caution flag is technical. Daily momentum indicators are signalling overbought conditions, which often precede consolidation or a pullback. That said, with limited UK data near term and sentiment still constructive, any correction may be contained unless the broader risk backdrop deteriorates.

EUR: CPI in focus; EUR mostly taking its cue from the USD leg

European liquidity may be thinner today given holidays across parts of the bloc, but Germany’s December CPI is the main release to watch. A step down to around 2.1% year on year would reinforce expectations for tomorrow’s eurozone inflation print near 2.0%.

ECB messaging remains broadly consistent with a high bar for renewed easing. While some officials have argued for retaining optionality, markets continue to lean towards the more restrictive interpretation: absent a material growth downgrade, inflation would likely need to undershoot meaningfully for 2026 rate-cut pricing to re-accelerate.

In FX, EUR/USD remains predominantly driven by the dollar side. One geopolitical variable worth monitoring is Greenland, where a more assertive US narrative has introduced a tail risk channel. EUR/DKK is a useful barometer in that context given the peg framework and the implications for intervention under stress. Without escalation, EUR/USD may stabilise around the 1.170 area in the near term.

Looking ahead

• US: ISM services is the next key swing factor for rates and USD; Fed speak could shape near-term repricing at the margin.

• Europe: Germany CPI today, eurozone inflation tomorrow; thinner liquidity may exaggerate moves.

• Geopolitics and risk: markets have moved quickly back to a risk-on stance. Any renewed headline pressure in Latam or around Greenland is the most obvious catalyst for a sharper risk-off move, with high-beta FX likely to wear it first.