FX Market Update: Dollar Firms as Data Risk Builds, Sterling Slips on Politics and Dovish BoE.

USD – Remains broadly supported after a recent rally, but softer labour-market signals are emerging that could challenge the dollar if confirmed by upcoming data.

EUR – Holding steady, with ECB policy continuity keeping volatility low and leaving EUR largely reactive to USD moves rather than a driver in its own right.

GBP – Has slipped back into underperformance as political uncertainty and a notably dovish Bank of England reprice rate expectations and weigh on sentiment.

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USD:

The dollar rallied to a two-week high overnight, despite some softer US labour-market data earlier in the week, before easing slightly this morning. Job openings fell sharply, with the headline JOLTS figure dropping from a downwardly revised 6.9M in November to 6.5M in December. This has increased focus on next week’s delayed non-farm payrolls report, which could prove a meaningful catalyst for dollar weakness if it confirms a broader cooling in the labour market.

Attention today turns to the University of Michigan consumer sentiment index, ahead of a heavy data calendar next week that includes the Employment Cost Index, retail sales, non-farm payrolls, and CPI inflation. With so many major releases clustered together, the dollar remains vulnerable to volatility, particularly if incoming data reinforces expectations that US economic momentum is fading.

EUR:

The euro remains relatively stable after the European Central Bank refrained from altering the narrative at yesterday’s meeting. President Lagarde downplayed concerns around recent EURUSD appreciation, noting that exchange-rate strength had already been factored into the ECB’s baseline projections last year. The familiar “good place” message was reiterated, and markets remain comfortable pricing in no rate moves from the ECB this year.

As a result, EURUSD dynamics are currently being driven more by dollar-side developments than euro-specific catalysts. In this environment, the euro is likely to trade directionally with USD sentiment rather than carve out a strong independent trend.

GBP:

Sterling’s brief spell of outperformance came to an abrupt halt yesterday, with GBPUSD falling nearly 1% amid rising political uncertainty and a dovish Bank of England meeting. GBPEUR also reversed sharply, erasing almost all of its recent gains. Markets appear increasingly uneasy about speculation surrounding Keir Starmer’s position as Prime Minister, particularly following controversy over the appointment of Peter Mandelson as US ambassador. There are concerns this could accelerate the timeline for a leadership challenge, potentially bringing a new Chancellor and more aggressive tax-and-spend policies at a time when public finances are already under scrutiny.

Compounding the pressure, the Bank of England delivered a much closer-than-expected vote split, with a 5–4 decision to hold rates rather than the anticipated 7–2 outcome. This has prompted markets to significantly increase bets on a March rate cut. Against this backdrop, sterling remains highly sensitive to both political headlines and shifts in rate expectations, with limited scope for sustained upside in the near term.

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