USD: Fed transition shifts focus back to rates

The dollar spent most of January under pressure, sliding to around 95.8 on the DXY, before finding its footing into month-end as attention moved from geopolitics back to policy. The Fed held rates at 3.50% to 3.75% on 28 January, and Chair Jerome Powell reiterated his term ends in May. Soon after, President Trump nominated former Fed governor Kevin Warsh as his successor. The appointment, seen as credible and market-literate, helped stabilise the greenback, and firmer December PPI reinforced the turn by pushing back against expectations for early-2026 easing.

The repricing has been most visible in rates: longer-dated Treasury yields edged higher as investors demanded more inflation compensation, while the front end stayed anchored by the Fed’s wait-and-see stance. Cross-asset moves echoed the shift. Early-month outperformance in high beta G10 FX faded as the dollar regained traction, while crowded precious-metal longs unwound sharply after record highs. Crypto also slipped, with bitcoin falling back below $80,000, underlining how quickly correlations can break when the dollar bid returns.

Warsh’s policy signal looks credible but adaptable. He built a hawkish reputation during his first stint at the Fed and has been sceptical of expansive QE, yet his more recent messaging has leaned toward a re-set focused on credibility, independence and a smaller balance sheet, potentially alongside lower rates if inflation allows. The political overlay remains live: Senator Thom Tillis has threatened to block confirmation until the DOJ probe into Powell is resolved, a reminder that the transition may not be frictionless.

GBP: BoE meeting returns domestic drivers to the fore

Sterling has largely been a passenger of broad dollar swings. Cable pushed above $1.38 last week as USD weakness intensified, but the move reversed hard after the Warsh nomination, dragging GBP/USD back below $1.37 in its steepest daily drop since early November. Even so, the pair is still holding above key daily and weekly moving averages, keeping the technical tone constructive provided the dollar does not extend its recovery too far.

This week shifts the spotlight back to the Bank of England. The headline call is for no change in Bank Rate, but the vote split and guidance should matter more than the decision itself. A divided MPC would keep the market debating the timing of the next cut. Recent wage data offers the doves some cover: private-sector regular pay growth eased to 3.6% in the three months to November, slightly under the Bank’s latest projections, but it is unlikely to settle the argument over how quickly policy should be eased.

Against the euro, sterling continues to grind into a clear technical ceiling. GBP/EUR has repeatedly failed near the 200-day EMA around 1.156, with the pair stuck in a tight range and sellers defending the topside. Downside levels to watch sit near 1.151, then 1.149 and 1.146, suggesting support is building even if upside progress remains frustratingly slow.

EUR: Growth pulse improves, but EUR/USD looks vulnerable to a firmer dollar

The euro ended last week on a better macro footing, with eurozone GDP growth confirmed at 0.3% q/q in Q4 2025, helped by firmer activity across Germany, Spain and Italy. Sentiment indicators have also improved, feeding a narrative that the region may be climbing out of last year’s soft patch, helped by investment plans and a period of calmer trade headlines.

The issue is what happens next. If the US retains a relative growth edge, particularly through AI-linked capex and resilience in activity, EUR/USD can struggle to hold extended upside, especially as FX becomes more sentiment-sensitive and the US turns more inward-focused in policy. In the near term, EUR/USD dip-buying interest will be a tell. The 1.188 to 1.190 zone looked like a key support area, and the break lower hints at renewed confidence in the dollar. A sharp euro bounce without supportive data would argue the broader damage to the dollar is not fully repaired, but for now the bias looks to be for further USD stabilisation.

The ECB is expected to deliver another low-event meeting on Thursday, with little change priced across 2026. The more useful signal may come from the flow of national data, particularly forward-looking German releases such as factory orders, for confirmation that stronger sentiment is translating into hard activity.

Looking ahead

• US data gauntlet: ISM manufacturing (Mon), ISM services (Wed), JOLTS and ADP before Friday’s jobs report; wages and revisions may matter as much as headline payrolls.

• Dollar direction: after the rebound, USD looks set to trade closer to short-term rates and data rather than politics.

• Central banks (Thu): BoE and ECB expected to hold; guidance and vote splits are likely to drive FX reactions.

• Australia: RBA decision in focus with AUD sensitivity elevated after firmer inflation prints.

• Key levels: watch EUR/USD behaviour on dips and GBP/EUR’s repeated failure near the 200-day EMA; breaks either way could end the current range trading.

• Earnings as macro signal: Disney (Mon), Alphabet (Wed), Amazon (Thu) for read-throughs on consumer demand and capex.