FX Market Watch: USD, EUR, and GBP in Focus.

• Dollar Correction in Focus: DXY is 2% off recent highs, with another 1-2% pullback possible. Key drivers include tariff adjustments and lower US Treasury yields, but structural dollar strength should return in Q2.
• Jobs Data as a Market Mover: A weak NFP report could push DXY down to 106.35/50, but we see this as the floor for Q1. Today’s range should stay between 107.50-108.00 unless jobless claims surprise.
• Ukraine’s Impact on EUR/USD: Optimism around peace talks lifted Ukraine’s bonds, offering some support to the euro. However, any EUR/USD gains above 1.05 are unlikely to hold, with a move toward parity expected in Q2.
• Bank of England Meeting Weighs on GBP: Sterling has rallied 1.7% since mid-January, but monetary policy uncertainty and potential US Treasury yield increases could stall further gains.
• GBP/USD Outlook: We expect GBP/USD to peak in the 1.25/26 area this quarter before trending toward 1.19/20 later in the year.

USD: Dollar’s Bull Run – Correction or Pause?

The DXY dollar index has pulled back about 2% from recent highs, leaving investors wondering if another 1-2% decline is in store. A key driver of this correction has been the latest tariff developments, with the Trump administration appearing to use tariffs as a negotiation tool rather than a fixed policy stance—though this could shift in Q2.

Another factor pressuring the dollar is the dip in 10-year US Treasury yields below 4.50%. A well-received Quarterly Refunding announcement helped stabilize the bond market, while the decline in USD/JPY has drawn attention as confidence grows in the Bank of Japan’s tightening cycle.

The next test for the dollar will be tomorrow’s jobs data. Weak JOLTS job openings earlier this week showed that soft employment figures can weigh on the greenback. However, we believe the dollar’s correction will be short-lived, with broader tariffs expected to resurface in Q2 and Treasury yields unlikely to decline much further. A weak nonfarm payroll (NFP) report could push DXY toward the 106.35/50 range, but we see this as the lower bound for Q1.

For today, a quiet US economic calendar suggests DXY will trade within a tight 107.50-108.00 range unless jobless claims surprise to the upside.

EUR: Ukraine Developments in the Spotlight

A wildcard for EUR/USD this year is geopolitical developments in Ukraine. Yesterday, Ukraine’s hard currency bonds gained traction, rallying 3-4% as optimism grew around potential peace talks. Reports suggest the US may unveil a peace plan at next week’s Munich Security Conference, and both sides appear more open to negotiations.

These developments helped Ukraine’s restructured bonds hit their highest price since issuance, while GDP warrants reached their strongest level since early 2022. Markets will watch closely for further updates next week, which could lend some support to the euro.

In the near term, the key question is whether tomorrow’s US jobs report could push EUR/USD briefly up to the 1.0530/70 zone. While this is possible, we don’t expect any gains above 1.05 to last. Our broader outlook still favors a move back toward 1.02 later this quarter and a potential drop to parity in Q2 as US tariff policies take shape.

For today, we expect EUR/USD to remain within a 1.0370-1.0450 range, with eurozone retail sales data and ECB speakers unlikely to move the market.

GBP: Sterling’s Rally Faces Headwinds

The Bank of England’s trade-weighted sterling index has climbed 1.7% since mid-January, helped by a rebound in UK gilts and a weakening euro. The UK’s lower exposure to tariffs—and possible exemption from new US tariffs—has also been a tailwind.

However, risks remain. If US Treasury yields start climbing again, it could put pressure on sterling. Additionally, while trade concerns have temporarily eased, investors will soon refocus on the UK’s fiscal and monetary policies. Fiscal discussions will ramp up in March, but today’s spotlight is on the Bank of England meeting.

Our base case is an 8-1 vote in favor of keeping rates unchanged, accompanied by a downward revision to growth forecasts—both mildly bearish for sterling. A more dovish surprise, such as a unanimous 9-0 vote with hawkish dissenter Catherine Mann backing a cut, would be more negative.

Looking ahead, we see GBP/USD topping out in the 1.25/26 range this quarter, with a strong case for a move toward 1.19/20 later this year.