USD: Politics in the chair, policy risk in the price

Reports suggest the Trump administration is lining up Kevin Warsh to succeed Jerome Powell. Compared with Kevin Hassett, also in the running, Warsh looks like the more orthodox choice given his prior spell as a Fed governor. That helped the dollar stabilise in Asia, partly because Warsh’s preference for easier policy is less overt than Hassett’s, and partly because markets read the alternative as more clearly dovish. Equities and Treasuries softened on the headlines, consistent with a modest repricing towards a firmer policy stance than investors had feared.

Even so, the bigger story remains how little the dollar is responding to rates. The latest Fed signal was mildly hawkish at the margin: the statement dropped language suggesting rising downside risks to employment, and Chair Powell reinforced a patient, data-led approach that keeps March and April cuts off the table in market pricing. Yet the USD reaction was brief and shallow. Comments from Treasury Secretary Bessent pushing back on US intervention in JPY also offered only fleeting support.

That disconnect speaks to what is now driving FX: policy credibility rather than the front end of the curve. The dollar bounced after the early-week slide, but there is still no convincing shift in tone. With gold and silver still behaving like investors want non-dollar hedges, the market remains wary of calling a bottom while price action stays detached from macro fundamentals. A cleaner run of strong US data is still the most likely catalyst for a more durable USD recovery, with jobless claims the immediate test today.

GBP: Risk sensitivity back in the driving seat

Sterling slipped as the week’s risk-off impulse returned, with equity markets rattled by renewed questions over how quickly large-scale AI spending converts into earnings. As risk appetite faded, flows moved into duration, pushing gilt yields lower and tightening the rate-differential headwind for GBP.

In the crosses, the pound continues to trade more like a pro-cyclical asset than a domestic story. GBP/USD benefited earlier from the broader USD wobble, but it struggled to hold those gains once de-risking spread across equities, crypto and metals. Against the euro, price action has been choppier, reflecting that both currencies have been used as liquid alternatives when investors reduce dollar exposure.

Focus now shifts to next week’s Bank of England decision. A hold is the base case, so the vote split and guidance will do the heavy lifting for market pricing, particularly with the MPC still viewed as divided.

EUR: Liquid alternative, but not immune to de-risking

The euro has been one of the main beneficiaries of scepticism towards the dollar, even as markets price further ECB easing this year and short-dated German yields fall further behind the US. That dynamic helped drive EUR/USD to fresh multi-year highs above 1.20 earlier in the week, supported by rotation into highly liquid alternatives such as the euro and gold.

Yesterday’s pullback was a reminder that the dollar can still attract haven flows when risk aversion bites. EUR/USD has retreated roughly 1.4% from its peak, though momentum indicators have cooled from stretched levels, which makes the move look more like consolidation than a clear trend reversal.

On the data front, the European Commission’s economic sentiment gauge improved in January, hinting at a firmer start to the year. For the ECB, the message is familiar: no urgent need to rush, but the Governing Council will still be alert to how a weaker dollar feeds back into financial conditions.

Looking ahead

• US: Weekly jobless claims; watch whether stronger labour prints can reassert the macro-led USD narrative.

• Fed leadership: Warsh headlines and any Senate soundings; confirmation risk could rise if the DoJ legal dispute escalates.

• Risk tone: Oil and equity volatility remain key drivers of FX correlations and USD haven demand.

• UK: BoE next week; the vote split and guidance matter more than the hold itself.

• Euro area: Sentiment and inflation expectations; any pushback from ECB doves if EUR strength tightens conditions.