USD: Macro re-prices in the dollar’s favour

The dollar started the week on stronger footing, extending last Friday’s bounce as the market re-embraced the US macro story. A more hawkish Fed lean, alongside the nomination of Kevin Warsh, helped rebuild confidence, while a clearing out of crowded short-USD positioning added technical lift.

Yesterday’s ISM manufacturing print reinforced the shift. January activity accelerated at the quickest pace since 2022, led by firmer new orders and production, signalling that recent geopolitical noise has not derailed an improving industrial cycle after a largely flat 2025. Some of the strength likely reflects front-loading linked to tariff uncertainty, plus the usual January restocking dynamics, but the direction of travel is still supportive.

The initial dollar bid on the Warsh headline looks as much about reputation as it does policy substance. Markets still anchor to a historically hawkish read, but attention will quickly move to how he communicates in real time and whether that framing holds.

Positioning data adds colour rather than conviction. CFTC numbers point to modest, tightly balanced exposures, suggesting investors remain reluctant to lean hard either way. Leveraged funds, in particular, have traded the dollar tactically, selling into periods of Washington-driven uncertainty and then rebuilding exposure into major events. The latest snapshot shows a return to small net long USD positioning, a turn from the prior fortnight.

Near term, follow-through looks capped. A partial US government shutdown has started to disrupt the data flow, with labour-market releases at risk of delay outside of ADP. The Senate has cleared a funding package, but House approval is still needed before it reaches President Trump. A deal could land quickly, potentially as soon as today, but the near-term message is simple: fewer data prints means fewer catalysts.

EUR: Europe watches the US, while politics barely registers

The euro remains largely a reflection of US rates and risk appetite. It slipped against the dollar at the start of the week, while holding broadly steady versus most of G10 peers. A more constructive tone in global markets was most visible in EUR/CHF, as the Swiss franc gave back some of its defensive gains from January.

Domestically, France has finally passed its 2026 budget after a volatile stretch that included two government collapses in short order. Prime Minister Sébastien Lecornu has cleared two confidence hurdles, bringing a measure of calm as attention shifts to March municipal elections and the spring 2027 presidential race. The FX market response has been muted, though the development is marginally constructive given how heavily French politics weighed on euro sentiment last year.

For EUR/USD, the bias still looks lower. The absence of key US data this week may slow the pace, but the pair continues to look vulnerable to a drift back below 1.18. We still look for a consolidation phase in the mid-1.16 to 1.17 area in coming weeks, with short-term valuation signals leaning toward the lower end of that range.

GBP: Risk tone helps, and GBP/EUR breaks higher before the BoE

Sterling benefited from the improving risk backdrop, trading firmer across G10, though it lagged the dollar. The price action in GBP/EUR was the clearest signal. The pair finally broke through the 1.1550 area that capped rallies through December, then pushed above the 200-day moving average near 1.1560 for the first time since sterling’s December 2024 slide versus the euro. That technical shift has encouraged fresh demand.

With the Bank of England meeting on Thursday, the market is leaning toward an unchanged outcome and the UK data pulse has not meaningfully shifted since December. That reduces the scope for a near-term dovish shock, which likely helped sterling buyers step in.

A bigger split on the MPC remains the key risk. More than two dissenters still looks unlikely, but a stronger push for looser policy would be a clear near-term headwind for sterling. For now, we favour GBP/EUR holding above 1.1550 through the remainder of the week.

For GBP/USD, the lighter US data calendar should limit downside momentum. Support near 1.36 looks well-defined, with the 21-day moving average in the mid-1.35s the next area to watch if sentiment turns.

Looking ahead

• US: Shutdown developments and any timetable for delayed labour data; ADP is the key release left standing.

• Fed/Warsh: Any further headlines that clarify policy lean or communication style.

• BoE (Thu): Vote split and tone, especially whether dissent broadens beyond Alan Taylor and Swati Dhingra.

• Risk sentiment: Equity performance remains the main driver for pro-cyclical pairs such as GBP/EUR and EUR/CHF.

• EUR/USD: Watch for renewed pressure toward the 1.18 handle once the US data flow normalises.