GBP: Hoping for a bit of retail therapy

Cable has stopped the bleeding at the 50 day moving average around 1.3528 after dropping more than three cents from the late January high, but the bounce looks like a pause, not a fix. This move is not being driven by a clean change in the macro story. It is mainly the market clearing out a crowded short dollar trade, and that leaves GBP/USD exposed, especially after a messy run of softer UK labour and inflation numbers this week.

Rates have reset sharply. Money markets now fully price a 25bp Bank of England cut by April, put better than even odds on a cut as soon as March, and have two cuts priced in by November. That repricing has dragged UK yields down. Ten year gilts are at their weakest since mid January. Sterling’s yield support has thinned, and the bias stays pointed lower.

GBP/EUR looks worse. The cross slipped under the 100 day moving average yesterday, a level that had reliably held since December, and it also closed below the last higher low at 1.1440. That is the uptrend since November breaking, full stop. It does not guarantee a straight line sell off, but it does tell you the market is now leaning on sterling rather than carrying it.

Friday’s retail sales are the obvious chance for a reset after the last release surprised on the upside and briefly steadied the pound by challenging the “weak consumer” narrative. The market now needs to see that resilience again. The problem is positioning. Traders are set up to punish weak UK data and largely shrug off good news. If the headline or the underlying trend softens, rate cut bets will harden and sterling will take the hit.

The make up of the number matters as well. Last month’s strength was driven mostly by online spending. If that unwinds, or if core categories roll over again, it will underline that momentum is still thin. With the consumer still the soft underbelly of the UK outlook, this print matters more than usual for GBP.

USD: Economic resilience meets hawkish Fed minutes

The US data pulse keeps pointing the same way. The economy ended the year stronger than expected, with housing and manufacturing repeatedly beating forecasts through December and January. Housing starts jumped to above 1,404k units. Industrial production in January rose a punchy 0.7%, miles above consensus. That run of upside surprises is forcing growth forecasts higher. Atlanta Fed GDPNow has climbed towards 3.7%, well above its earlier 2.6% call and also above the more cautious Blue Chip consensus. The US is simply running hotter than markets had assumed, helped by a manufacturing rebound and heavy tech capex as firms keep pouring money into AI infrastructure.

The Fed minutes made the policy message explicit and it is not dovish. Inflation persistence still worries them, while labour market concern has faded. The key line was support from several participants for a “two sided” framing of future rate decisions. Translation: cuts are not the only path. If inflation stays too high, they are prepared to consider raising the funds rate target range, not just holding it. That is a meaningful shift and it puts a firmer floor under the dollar than the market’s softer inflation narrative implies.

The stance also fits the hard data. Domestic demand looks durable. Even where goods spending has looked patchy, services consumption is still holding up, so the consumer is not rolling over. If the trade deficit narrows as some economists expect, manufacturing gains plus steady services demand could keep the growth story alive well into 2026. Against a softer global backdrop, that combination is supportive for the dollar.

The minutes also cleared up the noise around the January USD/JPY “rate checks”. They confirmed the Desk sought indicative quotes solely on behalf of the US Treasury, in the New York Fed’s role as fiscal agent. Meanwhile, equities are sending a split message. The S&P 500 may look flat on the year, but the internal picture has been volatile. Large speculators have stayed net short futures since the start of 2025, a stance that fits a market that still does not fully trust the growth story and takes the Fed’s willingness to hike seriously.

EUR: EUR/USD drifts lower as Fed hawkishness re asserts itself

ECB policymaker François Villeroy said the ECB is watching the euro’s level against the dollar closely and argued the bigger risk is inflation undershooting, not overshooting. That sits neatly with the latest inflation drift lower, with January headline at 1.7% year on year versus 1.9% in December. It keeps the ECB’s tone tilted dovish.

That said, the ECB does not target the exchange rate, so pretending there is a single magic EUR/USD line that forces policy is not realistic. If you want a rough diagnostic marker, a clean break above the 2021 high at 1.2349 would matter because it would invalidate the long term downtrend structure, but given the medium term balance of risks, that looks highly unlikely.

Rates markets are starting to price the undershoot story more seriously. OIS now implies around a 40% chance of an ECB cut by November 2026, the highest probability point on the curve and a sharp shift from December, when that same meeting still carried some chance of a hike.

In the market, EUR/USD barely reacted to the dovish remarks. Instead it drifted lower as the dollar firmed on better US data and the hawkish Fed minutes released at 19:00 GMT helped push the pair below 1.18. The tape is saying the improving US macro narrative is back in charge.

For the rest of the week, we expect EUR/USD to hover around 1.18, with downside risk if tomorrow’s PCE price index comes in firm. If PCE reinforces the still hot inflation concerns highlighted in the minutes, the pair is likely to stay pinned below 1.18 into next week.