USD: Growth firm, inflation floor higher

Late-2025 US prints still point to an economy running hotter than expected. November retail sales rose 0.6% m/m and MBA mortgage applications jumped 28.5%, reinforcing the view that demand has absorbed earlier tightening. The Atlanta Fed’s GDPNow is tracking Q4 2025 growth around 5.1%.

The gap between strong GDP and softer hiring looks increasingly structural. Recent Fed work implies the labour market now needs only c.30k jobs per month to stay in balance, down sharply from c.250k in 2023, allowing activity to hold up even as payroll momentum cools.

With PPI final demand at 3.0% y/y, markets are shifting from “has inflation bottomed?” to “where is the new floor?”, keeping the neutral-rate debate live and commodities supported. Near-term USD resilience may persist into Q1 if the post-shutdown rebound is validated, but durability hinges on growth staying strong without an outsized rise in yields.

GBP: Gilts bid, growth bounce, FX still range-bound

UK rates continued to rally, with 10-year gilt yields down 6bp to 4.34%, the lowest since December 2024. The fiscal reset has reduced immediate pressure at the long end, allowing the market to refocus on a clearer BoE easing profile.

This morning’s activity data surprised slightly to the upside. November monthly GDP rose 0.3%, reversing the prior decline and beating expectations. The ONS flagged a production-led rebound, including a recovery at Jaguar Land Rover following earlier disruption. Even so, the series is volatile and unlikely to materially shift the policy outlook on its own.

Sterling remains more sensitive to MPC tone than single data points. We expect GBP/USD to consolidate, capped by 1.3460 resistance and supported near 1.3420.

EUR: Volatility too cheap, positioning heavy

EUR/USD volatility remains unusually depressed, with 1-month implied below 5.3% and 6-month under 6%, offering limited compensation for macro and geopolitical uncertainty. With options hedging demand subdued, the set-up looks vulnerable to a sharp repricing if positioning unwinds.

Near-term risks lean modestly negative for EUR given stretched long positioning, reduced ECB tightening expectations, and the drag from firmer oil. Unless US institutional risk becomes a dominant driver, a dip below 1.16 cannot be ruled out.

Further out, political fragility in the core and China’s large trade surplus complicate the Eurozone mix, keeping downside risks in play. Still, we see scope for broader USD pressure from Q2 as US-specific risks build and Eurozone growth improves on fiscal support, leaving EUR/USD with a path back towards 1.20 later in the year.

Looking ahead

• US: Demand and inflation persistence remain the focal points, with yields the key constraint for USD upside.

• UK: BoE signalling and labour-market trends matter more than noisy monthly growth prints.

• Eurozone: Low implied vol looks vulnerable if energy, geopolitics, or positioning spark a volatility reset.

• Japan: Fiscal credibility and JGB volatility remain important spillover risks for G10 FX.