GBP: Pound loses its footing

Sterling slipped against the major crosses yesterday after a softer than expected labour market report, before finding some composure ahead of this morning’s inflation numbers. The data continued to show easing pressures, but not enough to really satisfy the market. Headline inflation fell from 3.4% to 3.0% as forecast, while core and services both dropped by 0.1 percentage point to 3.1% and 4.4%. Those were a touch firmer than consensus, which had been looking for 3.0% and 4.3%. While the broader cooling trend supports the Bank of England’s dovish lean, given its projected disinflation path, price action in GBP/USD and GBP/EUR stayed fairly contained.

That makes sense. The expected fall in the headline rate was sizeable and largely in the price already, so there was limited room for an extra leg lower unless the numbers materially undershot. Sterling had also seen heavier selling the day before, which raises the hurdle for fresh downside follow through. Technically, GBP/EUR looks like it has taken a knock: the pair closed below its 100 day moving average yesterday, a level that has held as key support since December, and it also settled beneath the most recent higher low at 1.1440 from 9 February. That breaks the steady upward trend in place since November. It does not automatically scream “sharp reversal”, but it does flag that sterling is becoming more exposed to downside risks.

In GBP/USD, cable found support at the 50 day moving average after a 0.4% drop, with the dollar helped by renewed tensions in the Middle East. That support arguably looks less convincing than the EUR leg, as the move lower in cable still reflects the unwind of a crowded short dollar position. For the rest of the week, Friday’s retail sales and PMIs matter most. The previous readings were encouraging, and if that strength is confirmed it could help keep a lid on sterling vulnerability for now.

USD: Supported ahead of key Fed signals

The dollar index is holding firmer above 97, helped in part by a sharp fall in the New Zealand dollar after the RBNZ left rates unchanged and markets scaled back tightening expectations. Focus now shifts to the Fed minutes, landing with strong jobs data but softer inflation shaping the debate on how quickly policymakers can pivot.

Geopolitics is adding noise too. The US and Iran have reportedly agreed a set of “guiding principles” in indirect nuclear talks, though a full deal still looks some way off. Oil’s failure to bounce has limited dollar upside, while US equity futures and Asian shares have stabilised as the AI led sell off cools.

Today’s durable goods and industrial production releases will be watched closely as a real time check on demand and factory momentum, at a point where markets seem primed to punish weak data more than they reward strong data. Soft numbers would reinforce the idea that the economy is slowing and keep pressure on the dollar. Any resilience would push back against the dovish narrative that has taken hold. The Fed minutes also matter, as they will show how united policymakers were behind the recent shift in tone, and whether the hurdle for cuts is in fact lower than Powell has implied.

EUR: Lagarde seen leaving the ECB early

The euro is a shade softer this morning, with only a limited reaction to reports that ECB President Christine Lagarde could leave before her term ends in 2027. The muted response suggests markets are not just considering the chance of a more hawkish successor, but also the risk of a leadership gap at a sensitive point in the policy cycle. Isabel Schnabel has been mentioned as a possible candidate, although Lagarde has previously pointed out that legal advice suggests current Executive Board members may not be eligible to take the top job.

On the data side, Germany’s ZEW index fell to 58.3 in February from January’s four year high, coming in well below expectations. The pullback, even if the level remains decent, is a reminder that the recovery in Europe’s largest economy is still fragile, with longer running headwinds in industry and investment unresolved.

Near term, EUR/USD remains above fair value and could edge lower without an obvious catalyst. Even so, with US data not exactly firing, the bearish case still lacks the fundamentals for a sustained break down. A move below the 21 day moving average around 1.1839 would be unsurprising, but the wider bullish set up remains in place for now, with the February lows near 1.1766 still looking like sturdy support.