The dollar ended last week almost unchanged against its major peers, although that masks what was an extraordinarily eventful and volatile few days in currency markets.
The greenback was well and truly clobbered at the start of the week, collapsing to its lowest level since early 2022, amid fears over the erratic nature of Trump’s decision making and the president’s comments that appeared to hint at the pursuit of a weaker dollar strategy. Yet, the dollar found a bid in the second half of the week, buoyed by the appointment of a new Fed chair, a hawkish FOMC announcement and remarks from Treasury Secretary Bessant that seemed to indicate Trump’s dollar remarks were nothing more than an offhand comment.
A couple of major central bank meetings will temporarily divert gaze away from the US later in the week. Both the ECB and Bank of England are set to stand pat on Thursday, although market participants will be keeping a close eye on the latter for any clues that could hint at the timing of the next cut. The US government is set to enter a partial shutdown today, but we don’t expect this to have any real impact on markets, particularly as the closure will likely be short-lived. Friday’s US payrolls report for January should go ahead as planned.
GBP
Sterling briefly made a march towards the 1.39 level on the dollar last week, before ending trading on Friday back below the 1.37 threshold. The pound was almost entirely at the mercy of the dollar last week, although we could see some activity surrounding Thursday’s Bank of England announcement. We expect no change in rates, and with the hawks and the doves similarly entrenched in their respective camps, another 5-4 voting split is entirely possible, with governor Bailey continuing to act as the sole swing voter.
Arguably of greater importance will be Governor Bailey’s press conference - his first of 2026. For now, we expect him to keep his cards close to his chest, reiterating that the timing of further cuts will be contingent on upcoming inflation data. Markets are not fully pricing in the next 25bp cut until July, but any sense that the MPC is increasingly confident on achieving its inflation target could raise bets in favour of another rate reduction as early as the April meeting.
EUR
We contest that the move above the 1.20 level in EUR/USD last week was perhaps a little stretched, particularly following Scott Bessant’s remarks that suggested that the White House still favours a stronger dollar policy. Yet, last week’s upbeat Euro Area GDP figures (+0.3% quarter-on-quarter growth) solidify our view that the common currency is well placed to perform well in 2026, particularly as we are yet to see the full effect from Germany’s stimulus package.
The ECB is universally expected to keep rates unchanged on Thursday, with President Lagarde almost certain to reiterate that policy remains in a “good place”, effectively indicating almost no appetite for further cuts for the foreseeable future. Her remarks on the recent rally in the euro will be watched closely by market participants, but we do not expect her to make any attempt to talk down the value of the common currency at this stage.
USD
The appointment of Kevin Warsh as the next chair of the Federal Reserve seems to have helped stop the rot for the dollar. While Warsh has recently aligned himself with Trump in calling for a lower fed funds rate, the fact that he was previously seen as a hawk during his stint as a Fed governor in the late-noughties means that he is probably less likely to advocate for aggressive cuts than messrs Hassett and Reider. His appointment may also act to calm fears over Fed independence, given that he has been a vocal advocate of preserving central bank autonomy in the past. Of course, any pick by the president will be regarded as a Trump loyalist to some extent, but we certainly view the Warsh appointment as the lesser of three evils.
It will be interesting to see whether the dollar continues to gain ground this week, as not only do we think that last week’s sell-off was excessive, but that downside risks to the currency have undoubtedly eased. The US government has partially shutdown, but the agreement on a spending package means that it is unlikely to last more than a few days. It also appears increasingly as though Trump’s dollar remarks were more spontaneous and extemporaneous than a structured policy position. If that is indeed the case, then the recent dollar bounce could have more room to run.
Deep dives and expert insights:
- G10 Weekly FX Update
- FX Talk: A Greenland U-turn and a yen rescue mission - Watch here
