FX Markets on Edge: Dollar Tug-of-War, Fragile Sterling and a Volatile Week Ahead

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Welcome to the first edition of my weekly FX and macro market outlook.

Each week I’ll break down what’s been moving currencies, what’s driving sentiment across the Pound, Euro and US Dollar, and what to watch in the days ahead. The aim is to keep things clear, practical and relevant for anyone with exposure to foreign exchange, whether that’s through business, property purchases or investments.

The markets have been pretty volatile over the last week, with FX dominated by a tug-of-war between a fragile US Dollar and regional political shifts. The Dollar initially weakened as markets leaned into “soft landing” hopes following cooling CPI data at 2.4%, but it found renewed safe-haven support mid-week after a tech-led stock sell-off triggered broader risk-off sentiment.

Sterling has looked particularly sensitive. It slipped against the Euro to hover around the 1.15 area as investors priced in a growing political risk premium amid rumours of a leadership challenge at Downing Street. Despite that, it managed to hold its ground against a softer Dollar, trading near 1.36 at points through the week. Meanwhile, the Japanese Yen staged a strong recovery towards the 153 level, driven by an unwinding of carry trades following a decisive election result in Japan, which has signalled a possible shift towards tighter fiscal discipline and eventual Bank of Japan policy normalisation.

Looking ahead, this week has the potential to bring more volatility, even though Monday is quieter due to Presidents’ Day in the US.

We begin properly on Tuesday with UK jobs data. Unemployment is expected to remain around 5.1%, while average weekly earnings are forecast to soften to 4.6%. Any deviation from these figures could move Sterling quite quickly, particularly if the data points to a cooling labour market. We also have German ZEW surveys, which are expected to improve to 65.0 from 59.6. A stronger confidence reading would reinforce the Euro’s recent resilience. Later in the afternoon, US manufacturing data and Canadian inflation are due, with US manufacturing expected to come in weaker, which could weigh on the Dollar if confirmed.

Wednesday starts with the RBNZ interest rate decision, where rates are expected to remain unchanged at 2.25%. In the UK, CPI inflation is due early in the morning, with core inflation expected to fall towards 3% and services inflation easing to around 4.3%. Falling inflation supports the case that previous rate hikes have worked, but it also gives the Bank of England more room to consider cuts down the line. In the evening, the FOMC minutes will be released, and markets will be watching closely for any signals on the timing of the next US rate move.

On Thursday, Eurozone consumer confidence and US jobless claims are the main focus. Neither is expected to cause major swings on their own, but a continued fall in jobless claims would underline the resilience of the US labour market and could give the Dollar some support.

Friday brings UK retail sales, expected slightly lower at 0.2%, which could put some pressure on Sterling if confirmed. We also have Flash PMIs for both the UK and Eurozone, with expectations for weaker readings, particularly in the UK. Finally, US GDP data is due, with growth expected to slow towards 2%. A softer reading would reinforce the idea that the US economy is gradually cooling, which could limit Dollar strength.

The bigger picture right now remains a constant push and pull between interest rate expectations, political developments and shifts in risk sentiment. Sterling still looks vulnerable to both domestic uncertainty and weaker growth data, while the Dollar continues to swing between safe-haven demand and expectations of future rate cuts.

As we move further into the year, volatility looks set to remain a key feature rather than an exception. I’ll continue to break down the key themes, risks and opportunities each week so you can stay one step ahead of the market.

Thanks for reading the first edition.