Political Uncertainty Weighs on Dollar, While EUR Holds Ground and GBP Recovers.

USD – Under pressure again as investor confidence in US assets weakens; policy uncertainty and political risk are outweighing supportive data.

EUR – Holding a relatively balanced position; mixed PMI signals and competitiveness concerns are limiting upside, but USD weakness offers some support.

GBP – Stabilising after recent volatility, benefiting from broad dollar selling, though lingering fiscal sensitivity keeps sterling fragile.

---

USD:

The dollar has resumed its downward drift after only a brief respite yesterday morning. Trump’s Greenland framework and the decision to scrap tariff threats initially eased pressure on the currency, but selling quickly returned through the afternoon and overnight. While the two major risks weighing on US assets this week — erosion of Fed independence and fresh US tariffs — have not ultimately materialised, Trump’s increasingly aggressive negotiating posture appears to have done lasting damage to investor appetite for US exposure, at least in the near term.

Yesterday’s core PCE inflation print was broadly in line with expectations and failed to provide fresh support for the dollar. Attention now turns to the January PMI releases this afternoon for signs of underlying momentum in the US economy. In FX markets, USDJPY is the standout pair after the Bank of Japan held rates steady this morning; a sudden and sharp 1% drop in the pair has raised suspicions of possible Japanese intervention, adding another layer of uncertainty to dollar trading.

---

EUR:

The euro is navigating a mixed backdrop. Political and corporate leaders at Davos have been vocal about Europe’s weakened competitiveness, with calls for increased defence spending and looser regulation growing louder. Reports of tension between US officials and ECB President Lagarde have added colour to the narrative, but for now remain more symbolic than market-moving.

Today’s PMI data underline the euro’s uneven recovery. France has surprised to the downside, slipping back into contraction at 48.6, while Germany has shown a notable improvement, rising from 51.3 to 52.5. The eurozone-wide PMI later this morning will be key in determining near-term direction. Overall, EUR remains supported by broad dollar softness, but gains are likely to be capped unless data momentum becomes more uniformly positive across the bloc.

---

GBP:

Sterling has found some stability, with GBPUSD pushing to a two-week high as the dollar sold off and UK assets calmed after a volatile few sessions. However, yesterday’s brief political scare was a reminder of how sensitive UK markets remain to fiscal credibility. Reports that Andy Burnham could find a route into parliament — and potentially challenge Starmer — triggered a swift 0.3–0.4% drop in GBP and a sharp reaction in gilts, reflecting lingering post-Truss-era nervousness.

That move has largely unwound as Starmer’s allies moved to block Burnham’s parliamentary ambitions, helping sterling regain composure. The focus now turns to the January PMI data, where consensus expects a relatively steady reading around 51.5. While a stable PMI could support further consolidation, sterling’s upside remains constrained by persistent concerns around fiscal discipline and the bond market’s continued influence over UK policy.

Economic Calendar