GBP: Domestic green shoots, but politics re-enters the frame

The UK backdrop has been consistently soft over the past six months, with the economic surprise index sliding towards -50, a clear sign that releases have repeatedly fallen short of even lowered expectations. That said, the latest run of data has started to improve at the margin.

December retail sales beat forecasts, rising 0.4% m/m (0.3% ex-fuel) versus expectations for a flat print. The annual rate printed at 2.5% y/y, well above consensus. Sterling reacted modestly, with GBP/USD nudging up towards 1.35 and GBP/EUR ticking higher, but the bigger point is that upside surprises now matter after a long stretch of downside misses. If demand proves more resilient, it may complicate the case for an immediate February BoE cut, which in turn helps the pound find a base, particularly versus the euro.

Politics is also back in focus. Reports of a potential parliamentary route opening for Andy Burnham have resurfaced concerns around fiscal looseness and a potential leftward pull within Labour. Party rules requiring NEC permission for mayors to run for Parliament may limit near-term risk, but 2026 still looks like a year where domestic politics can add a risk premium, especially into May’s local elections.

USD: Softer tape looks like pre-Fed positioning, not a regime shift

US macro signals remain firm, with Q3 2025 real GDP revised up to 4.4% SAAR, consistent with a still resilient expansion heading into 2026. The detail also points to private-sector momentum doing most of the work, with services-heavy sectors leading contributions, while government was a small drag.

Yet the dollar slipped around 0.4% yesterday even as risk conditions calmed and the VIX drifted back towards the mid-teens. That mix reads like tactical de-risking and position-squaring into next week’s FOMC rather than a decisive macro turn. With the fed funds target range at 3.50% to 3.75% and the effective rate near 3.64%, the market looks more focused on near-term event risk than on establishing a new trend.

Fundamentally, the case for a sustained USD downtrend still looks thin without a clear shift in Fed guidance or a meaningful repricing in the rates complex. If the Fed stays data-dependent and longer-end yields remain anchored, the balance of risks still includes a snapback higher in USD if shorts get crowded.

EUR: Range trading near 1.17 with PMIs and the Fed in charge

EUR/USD continues to orbit the 1.17 area, holding support near the 50-day moving average around 1.1670 and failing to extend above resistance near 1.1760. With geopolitics still a headline risk, the near-term price action looks increasingly technical until next week’s US macro narrative takes priority again via the Fed.

We still lean towards a drift lower towards 1.16 in coming sessions, assuming US data remain solid and the Fed does not validate aggressive easing expectations. On the ECB side, the December minutes highlighted a split Governing Council, with debate still active around inflation risks on both sides. For now, that keeps the policy signal broadly neutral, leaving the euro more reactive to incoming data and external drivers.

Looking ahead

• UK (GBP): January PMIs at 09:30 UK time, key for whether the data rebound broadens beyond consumption.

• UK politics: Watch for further headlines on Labour internal dynamics and any market read-through to fiscal credibility.

• US (USD): FOMC Jan 27 to 28, decision and press conference next Wednesday, with positioning likely to dominate into the event.

• Rates: US 10-year stability remains critical for USD direction; any breakout could force a sharp FX repricing.

• Eurozone (EUR): Flash PMIs due today, important for near-term EUR sentiment alongside ECB communication signals.