GBP: BoE in view, but sterling support looks intact

UK macro input is thin into tomorrow’s Bank of England decision, which makes it harder for dovish expectations to build. Since December, softer labour readings have been balanced by firmer PMIs and retail sales, while December inflation printed a touch hotter than forecast. The Bank’s Decision Maker Panel continues to flag wage expectations around 3.7%, reinforcing the MPC’s caution.

Sterling’s upswing since November has moved from positioning-led to more fundamental support. The BoE still looks reluctant to lean into further easing while inflation remains sticky, which should keep the near-term policy message steady and the medium-term path deliberately vague. Net, we see limited downside for GBP and a modest upside bias as the market trims back expectations for near-term cuts.

On the crosses, GBP/EUR remains close to year-to-date highs and the post-November trend remains technically clean. In GBP/USD, late-January strength has cooled, but demand has been evident on dips, suggesting the pullback is more consolidation than reversal.

USD: softer tone returns as equities wobble and data re-takes control

The dollar eased on Tuesday after a brief rebound from recent lows, with US equities dragged lower by renewed valuation concerns in parts of the technology complex. The S&P 500 fell 0.8% and the Nasdaq lost 1.4%, extending the early-2026 pattern of rotation away from large tech. Separately, uncertainty over the timing of rate cuts has re-entered the frame following the nomination of Kevin Warsh as Fed Chair, adding to near-term caution.

Even so, the dollar’s response to the equity drawdown was restrained, which suggests the market is less worried about a disorderly, US-led USD sell-off than it was previously. Volatility continues to drift lower and we still see incoming data as the key driver for the next directional move in USD crosses.

Today’s focus is ADP employment and ISM services. With official payrolls delayed following the shutdown, ADP carries added weight as a guide to January labour conditions. ISM services is expected to improve, and the risk skew looks slightly USD-positive if activity prints firm, particularly after Monday’s solid manufacturing ISM.

EUR: range-bound versus USD, softer on commodity-linked crosses

EUR/USD was largely contained, with the lull in US data helping the pair hold just above the 1.18 area, a key near-term support level. The euro underperformed more clearly against commodity-sensitive currencies as metals rebounded sharply and the AUD drew support from a hawkish RBA, with broader commodity beta also firmer.

Attention now turns back to the domestic calendar, starting with preliminary euro area inflation. Headline is expected to drop to 1.7% in January from 2.9% in December, largely a base-effect story, but the market’s focus will sit squarely on core. A softer core print, particularly if services cool, would increase sensitivity to any easing-friendly nuance from President Lagarde at tomorrow’s ECB meeting. Our base case remains a contained EUR reaction unless the core surprise is meaningful.

Looking ahead

• BoE policy decision and guidance tone (key for GBP front-end pricing)

• US ADP employment and ISM services (near-term USD catalyst while official data is delayed)

• Euro area flash inflation, with core and services doing the heavy lifting (ECB communication risk)

• Challenger job cuts later in the week (additional labour market signal for USD)

• Ongoing equity rotation away from mega-cap tech (FX risk sentiment and high beta spillovers)