USD: Yield support holds, with oil and hedging flows in focus

The dollar index is consolidating near one-month highs, holding firm despite ongoing US policy uncertainty and lingering concerns around Fed independence. December CPI did little to shift the near-term view that the Fed is likely to pause, while recent official commentary has become noticeably more hawkish.

Rates markets have responded by pushing the next cut back towards June, lifting relative US yields and keeping the dollar supported on carry and rate differentials. The next catalyst is the combination of PPI and retail sales, which should help validate whether pipeline inflation is cooling and whether demand is proving as resilient as recent data suggest.

Commodities add a further tailwind. Crude rose 2.6% to its highest level since October as Iran-related tensions rebuilt supply-risk premia. With the US now a net energy exporter, higher oil prices tend to be less of a growth drag than in prior cycles and can reinforce dollar support, particularly when broader risk signals remain mixed.

GBP: MPC split keeps FX rangebound into a heavy data run

Bank of England pricing remains constrained by a visibly divided MPC, highlighted by December’s 5-4 vote in favour of a cut and an ongoing reluctance to endorse a clear easing track. That places extra weight on rate-setter communication as the market looks for signs the committee is coalescing around a more dovish stance.

Speeches from Alan Taylor and Dave Ramsden, both December cut voters, are the near-term focus. Markets currently lean towards no move in February and assign roughly a 40% chance of a cut in March. Incoming UK data over the next two weeks, starting with monthly GDP, then inflation and labour-market releases, are likely to keep pointing to softer activity and a disinflationary backdrop. Even so, the data may struggle to move pricing materially without MPC guidance that signals a more unified shift.

In spot, sterling’s post-CPI bounce faded quickly and GBP/USD has found near-term support around 1.3425. With Fed easing repriced later into the year, the dollar is facing less immediate downside, leaving 1.3391 as the next support to watch.

EUR: Range persists as policy divergence reasserts itself

EUR/USD is lower by just under 1% year-to-date. A brief lift earlier this week on renewed Fed-independence concerns proved short-lived, with the pair slipping back below the 50- and 100-day moving averages.

The broader picture remains a well-defined range. Price action has repeatedly stalled near 1.18 and found demand around 1.15, with rate differentials re-emerging as the primary driver since the post “Liberation Day” period. As the Fed has resisted pivoting decisively dovish since starting its easing cycle in the second half of 2025, EUR/USD has struggled to sustain breaks higher. At the same time, one-year rate expectations have drifted in opposite directions: relatively less dovish for the Fed and less hawkish for the ECB, leaving the policy gap a headwind for upside.

Further out, the main EUR/USD catalyst may sit in US institutional risk rather than near-term data. The risk premium linked to Fed independence could become a more meaningful dollar negative into Q2 as leadership uncertainty rises, including the prospect of a Trump appointee replacing Powell. Markets have become more accustomed to tariff rhetoric, but a perceived shift in Fed governance could reignite de-dollarisation concerns and provide the conditions for EUR/USD to break out of its recent range.

Looking ahead

• US: Supreme Court tariff-related headlines, plus PPI and retail sales for confirmation on pipeline inflation and consumer resilience.

• UK: MPC speakers (Taylor, Ramsden), then GDP, followed by inflation and jobs as markets reassess the timing risk around BoE cuts.

• EUR: Watch rate differentials and any renewed focus on US institutional credibility as the key swing factor for the range.