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GBP - Policy in focus, losses contained
Sterling ended last week on the defensive, with GBP/USD slipping back below $1.3700, driven less by UK-specific weakness and more by renewed focus on the US policy backdrop. Dollar price action dominated, as markets reassessed the implications of an incoming Federal Reserve Chair under the Trump administration and the broader question of central bank independence.
Despite the near-term pressure, downside in Sterling remained measured. UK fundamentals continue to provide a degree of insulation, particularly as inflation dynamics keep the Bank of England on a more cautious easing path than many of its peers. Recent surveys point to emerging reflationary tendencies, while services inflation remains sticky. As a result, markets are pricing only a marginal probability of a March cut, with expectations skewed towards an initial 25bp reduction in April, followed by a gradual path lower over the year.
The coming week brings a pivotal inflection point with the BoE’s “Super Thursday” decision, updated economic forecasts, and Governor Bailey’s press conference. Rates are widely expected to remain unchanged. For senior decision-makers, the nuance will sit squarely in the Bank’s forward guidance, specifically, how explicitly policymakers validate current market pricing around the timing and pace of cuts. Volatility around the announcement is likely, though history suggests reactions may fade quickly as attention pivots back to US data later in the week.
Weekly Data:
5th February
BOE Monetary Policy Report - 12pm
Monetary Policy Summary - 12pm
MPC Official Bank Rate Votes - 12pm
Official Bank Rate - 12pm
BOE Gov Bailey Speaks - 12.30pm
EUR - Solid fundamentals, limited policy risk
The Euro closed the week softer, with EUR/USD retreating toward the $1.1850 / $1.1900 zone after failing to sustain a breakout above recent multi-year highs. The pullback reflected a firmer Dollar late in the week rather than a deterioration in Eurozone fundamentals.
On the contrary, European data surprised positively. Eurozone Q4 GDP expanded by 0.3% quarter-on-quarter, with Germany narrowly outperforming expectations. Consumer sentiment in Germany also improved, while January HICP inflation printed at 2.1% year-on-year, reinforcing the narrative of a gradual, orderly disinflation process rather than a sharp downturn.
Policy expectations remain anchored. The ECB meeting on Thursday is expected to deliver no change in rates, with markets pricing minimal probability of action through much of 2026. Attention will instead fall on President Lagarde’s assessment of currency strength, services inflation, and energy prices. Recent Euro appreciation has already moderated, reducing the likelihood of explicit FX commentary.
From a strategic standpoint, the Euro continues to benefit from improving relative growth optics and a predictable policy framework, if restrictive. That said, recent gains have left positioning more sensitive to US-driven shocks, particularly around global risk sentiment and trade policy headlines.
Weekly Data:
5th February
Main Refinancing Rate - 1.15pm
Monetary Policy Statement - 1.15pm
ECB Press Conference - 1.45pm
USD - Political noise meets hard data
The Dollar experienced a volatile but instructive week. Early losses drove the DXY to a four-year low, as investor confidence was shaken by escalating political pressure on the Federal Reserve, tariff threats, and deteriorating consumer sentiment. Conference Board Consumer Confidence fell to 84.5, the weakest reading in over a decade, underscoring growing domestic unease.
Midweek marked a partial reversal. The Federal Reserve held rates steady as expected, but Chair Powell struck a firmer tone, highlighting resilient growth and easing risks to inflation and employment. Additional support came from comments by Treasury Secretary Scott Bessent reaffirming the US “strong Dollar” policy, alongside progress toward averting a government shutdown.
The formal nomination of Kevin Warsh as the next Fed Chair initially weighed on the Dollar, reflecting concerns over future policy direction. However, markets ultimately stabilised on the view that Warsh is more likely to preserve institutional credibility than undermine it. Even so, expectations remain for two rate cuts in 2026, capping the Dollar’s upside beyond tactical rebounds.
This week returns the focus decisively to data. ISM Manufacturing PMI (Monday), JOLTS (Tuesday), ADP and ISM Services (Wednesday), and Friday’s Non-farm Payrolls and Unemployment Rate will shape rate expectations and near-term USD direction. Payrolls, in particular, remain the key risk event for cross-asset positioning.
Weekly Data:
2nd February
ISM Manufacturing PMI - 3pm
3rd February
JOLTS Job Openings - 3pm
4th February
ADP Non-Farm Employment Change - 1.15pm
ISM Services PMI - 3pm
5th February
Unemployment Claims - 1.30pm
6th February
Average Hourly Earnings m/m - 1.30pm
Non-Farm Employment Change - 1.30pm
Unemployment Rate - 1.30pm
Prelim UoM Consumer Sentiment - 3pm
Prelim UoM Inflation Expectations - 3pm
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