USD: Resilient but Policy Risk Lingers

The US Dollar Index has traded in wide ranges, briefly touching 98.1 before easing back towards 97.7. Despite a rise in volatility, the dollar has held firm as markets weigh solid growth against persistent inflation and renewed trade uncertainty.

The administration has transitioned from the overturned IEEPA tariffs to temporary 15 percent levies under Section 122. While this preserves the effective tariff rate broadly in line with last week, the absence of long-term clarity continues to cloud the outlook. That said, recent court decisions have reduced the scope for abrupt tariff action, offering a measure of institutional stability.

Inflation remains sticky, with core CPI at 3 percent. The Federal Reserve has responded with a cautious tone, signalling reluctance to ease prematurely. This hawkish bias continues to underpin the currency. Any prospective tariff refunds are unlikely to provide near-term fiscal support, given the historically slow processing timeline.

Geopolitical tensions, particularly between the US and Iran, have pushed volatility gauges above 20 and lifted oil prices to fresh yearly highs. For now, markets anticipate limited escalation rather than a sustained shock to risk assets.

Equities continue to perform constructively, with nearly 80 percent of companies beating earnings expectations. Notably, leadership is broadening beyond mega-cap technology into energy and consumer staples, improving the quality of the rally in the S&P 500.

GBP: Political Risk Re-enters the Frame

Sterling has softened through February as markets priced in the prospect of Bank of England rate cuts beginning in March and extending later into the year. Even firmer flash PMIs failed to materially shift expectations. Instead, price action has tracked global risk sentiment more closely than domestic data.

On the crosses, technical momentum has deteriorated. The 100-day moving average near 1.1456 in EUR/GBP has turned from support into resistance, with repeated failures to reclaim the level. A move towards 1.14 appears feasible, with November’s 1.1320 low back in view if downside pressure builds.

Against the dollar, GBP/USD fell to 1.3433 last week as higher oil prices and broad dollar strength weighed. The pair tested its rising 200-day moving average, a level that has held consistently since late 2025. While the broader uptrend remains intact, the recovery towards 1.35 leaves the pair close to its 10-year average, limiting immediate upside momentum.

Domestic politics may become more relevant. This week’s Gorton and Denton by-election poses a test for Prime Minister Keir Starmer. A surprise result could amplify internal pressures and increase the perceived risk of a less market-friendly policy mix, a factor not fully reflected in sterling.

EUR: Momentum Softens Near Key Averages

The euro has slipped below 1.18 against the dollar, trading around its 50-day moving average, which is providing near-term support. With EUR/USD now beneath a declining 21-day moving average, short-term momentum points lower. The 100-day moving average just under 1.17 represents the next key technical level and may draw price action if pressure persists.

For the dollar, policy uncertainty remains a structural headwind, creating a two-way pull. A firm US economy and reduced expectations for near-term Fed cuts offer support, yet trade and geopolitical risks temper enthusiasm. Periods of dollar softness typically provide scope for euro demand through broader anti-dollar positioning.

On the macro front, Germany may be showing early signs of cyclical improvement. The Ifo index rose to 88.6 in February from 87.6, its strongest reading since last summer. Both current conditions and expectations improved, suggesting sentiment is stabilising. Fiscal support, particularly in defence and infrastructure, is feeding through to order books and inventory adjustment. If sustained, this could lend the single currency firmer medium-term foundations.

Looking Ahead

• US: State of the Union address; consumer confidence (Tue); PPI (Fri); heavy Federal Reserve speaker schedule

• Europe: Regional inflation prints (Fri); Tokyo CPI (Fri)