USD: dollar recovery capped by Fed politics

US markets snapped back after President Trump stepped away from Greenland-linked tariff threats at Davos, triggering a fast unwind of defensive positioning. Equities rallied hard and the long end of the Treasury curve caught a bid as volatility measures reversed the prior day’s spike.

Even so, the dollar’s bounce looked hesitant. Tariffs remain a clear vulnerability, and the currency is still carrying a discount versus where unretaliated tariff assumptions would typically place it. Added pressure comes from uncertainty around Fed succession, renewed concerns over political influence, and the risk of higher FX hedging by foreign investors, particularly from Europe. With investors entering the year heavily long USD, any negative shock could force a sharper squeeze into alternative funding currencies, including the euro.

GBP: steadier on the crosses, but rates risk lingers

Sterling recovered modestly against the euro and the usual safe havens as geopolitical stress faded, but the move was contained. GBP/USD held above 1.34, while GBP/EUR struggled to regain 1.15, running into near-term technical resistance.

Domestic data have been mixed but meaningful. A stable unemployment rate supports a cautious Bank of England, while softer wage momentum keeps the door open to earlier easing. With fewer than two cuts priced for 2026, expectations still look light, leaving the pound exposed if incoming data continue to validate the disinflation story.

EUR: sentiment tailwind fades, but the dollar story still drives

The euro gave back some of its earlier gains after EUR/USD failed to sustain the push through the 1.1740 area and slipped back into the 1.16s. This week’s EUR support has been largely sentiment-led, interrupting the more cautious tone that had followed a Fed-driven repricing.

That said, the macro backdrop remains the main anchor for near-term direction. Markets now have recent experience of tariff shocks that did not materially derail US growth, which may temper the impulse to fully reprice USD risk. Europe’s political divisions also remain in focus, with leaders split between confrontation and dialogue, limiting the confidence behind any sustained euro-led move.

Looking ahead

• US data focus: third estimate of Q3 GDP and the Fed’s preferred inflation gauge; watch for confirmation that core goods pressures continue to cool.

• Fed path: if tariff inflation risk continues to fade, the bar for mid-year rate cuts may lower.

• UK calendar: January PMIs and December retail sales are the next catalysts for sterling direction.

• Rates and fiscal optics: keep watching long-end yield stress, which remains a key driver of FX underperformance in USD, GBP and JPY when it spikes.

• Headlines risk: Greenland de-escalation helps, but NATO and tariff rhetoric can still reprice quickly.