Dollar Softens as Risk Appetite Improves; Sterling Outperforms, Euro Awaits Inflation Data.

• USD – The dollar has softened as geopolitical tensions eased and risk appetite improved, with weak US manufacturing data adding pressure.
• EUR – The euro is steady but cautious, with inflation data in focus and softer price pressures limiting upside momentum.
• GBP – Sterling is outperforming, supported by improved sentiment, equity market strength, and firmer UK price data.

USD:

The dollar’s recent geopolitical boost proved short-lived, as fears of further military escalation faded and positive risk sentiment pushed equities higher. The ISM manufacturing index added to the softer tone, posting its tenth consecutive contractionary reading and falling to a 14-month low, reinforcing concerns about underlying US growth momentum.

Markets now turn their attention to Fed speakers Barkin and Miran later today, alongside the final December PMI reading. However, the bigger focus lies ahead, with a heavy US data calendar tomorrow including ISM services, JOLTS, and durable goods orders. Collectively, these releases will be watched closely for confirmation of whether slowing activity strengthens the case for future rate cuts.

EUR:

The euro is trading in a more data-dependent environment, with eurozone inflation firmly in focus. French inflation fell to a seven-month low of 0.7%, largely driven by lower energy prices, setting a softer tone for today’s releases.

German regional inflation figures are due throughout the morning, followed by the national reading later today. Eurozone-wide inflation is released tomorrow and is expected to ease to around 2.0%. While lower inflation may reinforce expectations of eventual ECB easing, the gradual nature of the slowdown keeps policy expectations relatively anchored for now, leaving the euro broadly stable rather than decisively stronger.

GBP:

Sterling had a notably strong session yesterday and has started 2026 on a firm footing, up around 0.6% against the dollar and 0.8% versus the euro. There was no single clear catalyst, but improved sentiment appears to have been supported by comments from Prime Minister Starmer signalling openness to closer EU ties, alongside the FTSE 100 breaking above the 10,000 level.

Adding to the positive tone, BRC shop price inflation surprised to the upside at 0.7% this morning, helping reinforce the idea that UK price pressures may prove stickier than some had anticipated. In the near term, improved sentiment and relative resilience leave sterling better supported than in recent sessions.

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