GBP
Sterling joined in the general rally against the dollar last week. A positive surprise in the fourth-quarter GDP report, which showed modest 0.1% expansion after economists were bracing for a mild contraction, certainly helped sentiment. We are also perhaps seeing an element of realisation that the February Bank of England meeting was more hawkish than first thought. Speaking last week, MPC member Greene blamed supply constraints, rather than insufficient demand, for sluggish growth, which is a welcome change in our view.

This week will be unusually rich in terms of new information about the UK economy, as labour, inflation and business sentiment reports are all due to be released. By Friday afternoon, we should have a much clearer view of the potential for further policy easing. Megan Greene’s comments, at least, suggest that UK rates may stay higher for longer, and the next cut is now not fully priced in until the bank’s June meeting.

EUR
The apparent delay of any general tariffs aimed at the European Union, for at least a few weeks, was greeted with relief by European assets and the euro. We do note, however, that the threat has only been pushed back in time, and not for very long, so we would be skeptical of any further rally in the common currency unless we start to see some narrowing in the economic performance gap across the Atlantic.

Two timely reports this week could begin to show evidence of such a narrowing. On Tuesday, we get the ZEW survey of investors expectations, followed on Friday by the February flash PMIs of business managers sentiment. Consensus is in favour of a modest uptick in both the services and manufacturing indices, which may alleviate some of the near-term concerns over the state of the Euro Area economy. Growth remains weak, however, and further interest rate reductions from the ECB appear almost nailed on.

USD
The stability of US Treasury rates last week was remarkable considering the newsflow we have been seeing on inflation. The upward surprise in wages in the January labour report was followed last week by unpleasantly upward surprises in all of the main inflation metrics. A 0.5% month-on-month print in the headline report, which equates to 6% annualised, and a 0.4% monthly jump in the core index (5% annualized) is the last thing that the Federal Reserve wanted to see. We argue that this perhaps brings into question the possibility of any cuts in rates at all in 2025, which is clearly a dollar positive.

For now, the US bond market is taking this news in stride, and the US dollar is trading off of tariff-related headlines, for the most part. With little news of note this week (the PMIs are less market moving in the US than elsewhere), and a holiday-shortened week, the dollar will probably trade mostly off news elsewhere – assuming no further tape bombs from the Trump administration, of course.