GBP: Breakout extension, but stretched short term

Sterling has pushed above $1.38 versus the dollar for the first time since October 2021, with price action doing most of the talking. GBP/USD has risen close to 3% in four sessions, lifting from the mid 1.34s to the high 1.38s, and placing $1.40 back on the radar as the next headline level.

The options market is consistent with the spot move. One week risk reversals show the strongest bias towards GBP calls versus USD puts since 2019, while longer dated skew has snapped back to levels last seen during last year’s tariff shock. Broader volatility is also reawakening, with the G10 one month implied versus realised gap at its widest in more than a year, pointing to a market paying up for protection.

Technicals are running hot, with daily momentum indicators in overbought territory, but the move looks less about yields and more about a shift in FX flows. US rates have been comparatively stable, suggesting the driver is hedging and allocation rather than a fresh repricing of Fed cuts.

USD: Policy premium returns, FX flows lead the selloff

The dollar’s decline has been fast and broad based, and notably not led by a collapse in US yields or an outright wobble in US risk assets. The pattern fits an FX driven rotation: asset managers increasing hedge ratios on US exposures, and systematic or speculative accounts pressing short USD positions as ranges give way.

The market is also wrestling with the optics of a weaker dollar preference in Washington. Reports of coordination between Japanese and US authorities to support JPY and restrain USD have kept intervention risk firmly in focus, and raised wider questions around Treasury messaging and the policy mix. Comments signalling comfort with currency weakness have reinforced the sense that a policy risk premium is back in the price.

Near term, the main test is the FOMC communication. A pause narrative could steady the dollar at the margin, but the more important signal is whether any bounce is shallow. A weaker close on the day, even with higher front end yields, would underline bearish USD momentum. Beyond the Fed, attention turns to large cap tech earnings as a potential catalyst for risk sentiment and, by extension, the dollar’s hedge dynamics.

EUR: Dollar leg higher, 1.20 cleared as hedging demand rises

EUR/USD has broken through 1.20 and is trading near multi year highs, with the move still best viewed as USD led rather than EUR propelled. The euro has benefited as the most liquid alternative, alongside CHF and JPY, and hedging costs reflect that demand, with investors paying up for protection against further USD slippage over the next month.

That said, the rally looks stretched versus rate differentials, and the dislocation is becoming harder to justify on macro alone. The Fed meeting should reintroduce some discipline, particularly if Chair Powell leans hawkish to reinforce institutional independence and resist the appearance of political influence. In that scenario, the balance of risks shifts towards consolidation in EUR/USD rather than immediate follow through.

Looking ahead

• FOMC decision and press conference: focus on whether the dollar can stabilise on communication rather than rates

• USD/JPY intervention optics: any official pushback or confirmation could move markets quickly

• Mega cap tech earnings: a risk wobble could accelerate hedging flows and intensify FX volatility

• Key levels: GBP/USD 1.40 in focus, DXY support region near last year’s lows remains a near term marker