USD: CPI likely secondary to jobs, but risk skew still firmer

US inflation today should matter less than this week’s payrolls print. The Fed has made clear it is in no rush to ease again, and it remains labour market conditions that most reliably shift the policy debate.

We look for little drama in January CPI and sit close to consensus at 0.3% m/m and 2.5% y/y for both headline and core. That outcome would sit comfortably with the recent hawkish adjustment in Fed pricing, which in our view still leaves the dollar slightly cheap on a short-term basis.

Even so, this week’s price action points to an appetite to fade USD strength, and that makes a sustained rebound harder to argue for. One constructive signal for the dollar has been the market’s reaction to the latest US tech weakness, which appears to have restored some defensive demand for the currency.

GBP: pressure versus EUR as BoE tone turns and politics adds a risk premium

Sterling is set for its steepest weekly fall against the euro since early December, with GBP/EUR down for a second straight week. The cross was last around 1.1466, leaving it roughly 0.4% lower on the week. After an unsettled opening, the pair has stabilised in the mid-1.1460s and may drift sideways into the close. The technical setup has worsened. A second consecutive weekly decline has flipped the near-term tone, and the cross is now below its 50-day moving average, a level that often signals scope for further weakness if it holds.

The initial catalyst was the Bank of England’s February 5 update, which acknowledged stagnant growth and a softer labour market, reinforcing expectations that another rate cut is moving closer. Domestic politics has layered on additional uncertainty. While Prime Minister Keir Starmer has come through a difficult period, investors appear increasingly sensitive to the risk of a shift towards more left-leaning policy, with potential implications for fiscal credibility and gilt sentiment.

Next week’s UK labour market and inflation prints should be the key inputs. Weak data would likely harden expectations for further BoE easing and keep GBP/EUR biased lower, extending what is starting to look like the cross’s poorest patch since late last year.

EUR: data light, ECB steady, valuation still stretched versus USD

The euro area diary is thin, with the second estimate of Q4 GDP expected to confirm 0.3% q/q. That should not move markets. Attention is more likely to sit with ECB communication, including comments from Vice President Luis de Guindos, though recent remarks from policymakers have generated little traction and have largely reinforced a neutral baseline. There has also been limited follow-through on the euro’s post-meeting strength, suggesting no immediate pushback from the ECB. With little fresh information, rate expectations look set to remain broadly stable.

On valuation, EUR/USD short-term fair value has eased to around 1.165 following the latest hawkish shift in the US curve, leaving the pair more clearly rich. While that points to downside risks, we are not convinced the gap closes quickly given the market’s tendency to sell USD rallies.

Looking ahead

• US: CPI release, plus any Fed speakers that could validate the latest repricing

• UK: labour market report and CPI next week, key for BoE cut timing

• Euro area: second Q4 GDP print, ECB speaker risk (de Guindos)

• Markets: watch whether risk-off impulses continue to support the USD as a defensive hedge