USD: Dollar steadies ahead of PCE

Markets were subdued yesterday with the US closed for Presidents’ Day. The dollar was fairly quiet, though the DXY index crept back above 97. That looks reasonable: the greenback still appears cheap versus macro based fair value, and when you are that stretched, technical levels tend to matter less. With no new catalyst to justify a fresh widening of the gap, a bit of mean reversion is the natural outcome.

Even so, the tone around the dollar remains soft, in a way that echoes the post Liberation Day backdrop. Talk in the eurozone about boosting the euro’s standing in global markets and trade keeps the diversification narrative in focus, which makes a return to “fundamentals” more uncomfortable than it otherwise would be. The weekend news that the ECB widened access to its EUREP repo lines from a mainly European user base to a broader global central bank community is a good example of that shift.

Technically, the DXY’s 21 day moving average looks vulnerable, and short covering could be enough to force a bullish crossover this week. While we do not expect the market to react strongly to incoming numbers, Friday’s PCE deflator, the Fed’s preferred inflation measure, is in focus. The core reading is expected to edge up on both a month on month and year on year basis versus November. Unless it surprises on the downside, that should help keep the index supported above the near term trend line. Even so, we remain sceptical about a sustained move above 98 over the medium term.

EUR: Risk reversals wobble, but the uptrend remains

With interest building around the euro’s international role, euro area finance ministers met in Brussels yesterday to discuss how to expand the single currency’s use in issuance and day to day transactions, with the broader goal of reducing reliance on the US dollar. That follows the ECB’s weekend message that it stands ready to provide euro liquidity to central banks worldwide through euro repo lines.

These developments may not, on their own, push EUR/USD materially higher, but they do make it easier for the market to stay constructive if US led dollar weakness re emerges. In the near term, the pair remains comfortably above fair value and, absent a clear catalyst, could drift lower. Still, we have argued that with US macro data not especially convincing, EUR/USD bears have limited ammunition to make the case for a sustained decline. A dip below the 21 day moving average at 1.1839 would not be a shock this week, but the broader bullish set up should remain intact, with the February low at 1.1766 looking like firm support for now.

Options pricing lines up with that picture. Near term downside risk is being acknowledged, with one week risk reversals turning bearish for the first time since January. Further out, however, positioning still looks more confidently bullish, which makes us reluctant to call an end to the euro’s climb against the dollar since mid January.

Looking ahead, Germany and the eurozone ZEW surveys are due today. The expectations component has rebounded sharply from the April 2025 lows and now sits close to levels last seen around 2021. It will be worth tracking as 2026 brings less trade uncertainty and, potentially, the long anticipated German fiscal stimulus.

GBP: Sterling slips after a dovish jobs print

Sterling is extending losses this morning after UK wage growth came in below expectations and unemployment rose to a near five year high. GBP/USD has dropped beneath its 21 day moving average, bringing the 50 day level around $1.3525 into view. GBP/EUR is also back testing the key €1.1460 support zone we have highlighted for weeks.

Weekly earnings in December rose 4.2% versus 4.6% expected, while regular private sector pay, the Bank of England’s preferred measure, slowed to 3.4%, its weakest pace in more than five years. With the Bank explicitly pointing to a move towards 3.25% as consistent with 2% inflation, today’s data will be read as progress.

The labour market is loosening more clearly too. Unemployment climbed to 5.2% in the three months to December, the highest since early 2021. Payrolls fell by a further 11,000 in January, taking the annual drop to 134,000. For policymakers already worried about soft demand, that mix strengthens the argument for additional rate cuts.

Pricing for a March BoE cut has risen to roughly 80%, from about 70% just a day ago. With expectations already skewed dovish, Wednesday’s inflation report does not need to do much. A confirmation that disinflation remains on track would likely be enough to cement current thinking. Markets now fully price another cut before year end.

In this context, the bias for sterling still looks tilted to the downside, particularly as much of the political risk premium has already come out ahead of next week’s by election, which is likely to add pressure on Prime Minister Keir Starmer.