GBP: Pound powers to 4-year peak
The British pound traded above $1.38 against the US dollar for the first time since October 2021. Several factors are weighing on the US currency simultaneously, as detailed in the sections below, but the common thread is erratic US policymaking, which has revived the dollar’s risk premium and pushed investors to rotate out of dollar‑denominated assets or hedge their exposure.
Price action tells the story clearly: the dollar’s slide has been sharp and decisive. GBP/USD has climbed nearly 3% in just four trading days — from around $1.34 to above $1.38. The move looks convincingly bullish and could mark the beginning of a shift into a higher trading range, with the psychological $1.40 level now the next upside marker.
The FX options market reinforces this momentum. Positioning for a stronger pound versus the dollar is now the most bullish over a one‑week horizon since 2019, while longer‑dated risk reversals have surged back to levels last seen during the tariff shock last April.
More broadly, FX volatility has — as we warned — returned with force. The G10 one‑month implied/realised volatility spread is at its widest in over a year, signalling that traders are bracing for more turbulence ahead.
USD: Dollar breakout ahead of Fed Day
While today’s Federal Reserve (Fed) meeting is widely expected to be an uneventful affair for immediate rate changes, the substantive weight rests on the post-meeting press conference. For the Fed, a shift in stance would require a visible cracking in the labor market or a more convincing descent in inflation, yet the current data set offers neither. In fact, the US economy is currently a study in contradictions, defined by a jarring disconnect between top-line strength and ground-level sentiment. While Q4 growth numbers are pointing above a staggering 5%, consumer confidence has simultaneously cratered to its lowest point since 2014. This divergence is mirrored in a peculiar labor market where the time required to land a new role has hit its highest level since 2021, even as initial jobless claims refuse to signal a recessionary surge.
It was a big day in FX yesterday, as volatility reawakens near month-end. The US Dollar Index (DXY) slid as much as ~1.4%, hitting 95.57—its weakest since February 2022—after President Trump waved off the dollar’s drop and said he wanted it to “seek its own level.” That move has amplified a broad “Sell US Dollar” rotation: EUR/USD pushed up toward 1.20 (intra‑day highs near 1.2037), GBP/USD tagged the high‑1.38s (around 1.3836), and USD/CAD broke below 1.36 intraday to around 1.358. All prints were recorded after 4 pm Eastern Time.
Fed Chair Powell’s outlook today may provide the fundamental support the US Dollar needs to sustain its breakout above a persistent seven-month trading range. However, this support faces mounting pressure. Policy uncertainty is intensifying as the administration extends tariff threats beyond traditional adversaries to include allies like the EU and South Korea, even following recent trade agreements, have deepened the sense that “handshake deals” aren’t sticking. This expansion of risk has reintroduced a “policy risk premium” and echoes of ‘Liberation Day’ sentiment.
Rather than a standard “risk-off” environment where investors are flying to the safety of the Dollar, we are seeing a period of repositioning. Global investors remain bid for US assets, supported by a relatively calm 10-year yield and anticipation of major tech earnings, but they are increasingly wary of the currency itself. This has led to a surge in downside hedging as the cost of protecting against a weaker Dollar rises. With the US Dollar already down 2.6% year-to-date, the market is palpably anxious that the first half of 2026 will mirror the volatility in H1 2025.
The situation is further clouded by intense speculation regarding a potential joint intervention between the Fed and the Bank of Japan, alongside growing fears over the Fed’s long-term independence. The rumor mill regarding a “Mar-a-Lago” lite suggests a tactical willingness by the Treasury to tolerate a weaker dollar to prevent Japan from liquidating Treasuries to support the Yen. This isn’t necessarily a sign of structural US weakness but rather a calculated move to manage global liquidity and protect domestic funding conditions. The institutional shift is highlighted by the rising odds of Rick Rieder taking a leading role at the Fed, signaling a move toward a policy framework that prioritizes easier financial conditions.
This macro regime shift has caused a visible fracture between the Greenback and interest rate differentials. Even though yield spreads remain elevated, the US dollar Index has cratered toward the 96 level, indicating that the market is front-running a coordinated move lower rather than trading the Fed’s dot plot. Investors are turning to gold and silver—currently trading above $5,000 and $100 respectively—as systemic insurance against fiscal dominance/US policy risk premium environment. Whether current Dollar weakness sets a new baseline or triggers a violent mean-reversion depends partly on Powell delivering a hawkish surprise to match the positive US growth outlook. For now, FX markets will likely remain tense near key thresholds.
EUR: Dollar distress, euro excess
EUR/USD continued its ascent yesterday on a deeply weakened US dollar, with the pair breaking through the infamous 1.20 level. It now sits over 2% higher year‑to‑date and near five-year highs. The move has been entirely US‑driven. One could argue that Japan’s intervention risk merely accelerated the dollar’s decline, but the true catalyst was a sharp deterioration in sentiment following a clustering of policy decisions from the Trump administration that revived investor fears, leaving the dollar as the symptom of broader distress.
We had argued that the bar for further dollar weakness on sentiment alone was high, yet the year has surprised as each familiar theme – to which markets had grown numb – resurfaced in reinforced form. Tariffs, coupled with geopolitical threats involving Greenland. Renewed pressure on Fed independence, now reinforced through legal channels involving the DoJ. In short, that higher bar was ultimately met – and the proximity of these “upgraded” USD‑negative events only amplified the bearishness.
The euro has been one of the key beneficiaries of recent dollar weakness as the second‑most‑liquid alternative, alongside the Swiss franc and even the yen, which despite its bruises has found support on rising BoJ FX‑intervention risks. Investors are now willing to pay the highest premiums to hedge against these currencies strengthening against the dollar in the month ahead.
Still, EUR/USD’s rise looks highly overstretched, both technically and fundamentally, as the pair becomes notably dislocated from EUR:USD rates spreads.
Today, some macro discipline should reassert itself with the Fed’s first policy meeting of the year, as hawkish expectations quietly build beneath the noise. We may hear a more hawkish Powell than the data alone would justify, given recent reports about the criminal investigation launched by the DoJ. These developments may have unintentionally forged a more assertive stance from Powell, who could lean harder on the hawkish pedal to signal no capitulation to the administration’s demands. The dollar’s reaction will be closely scrutinized, as the event serves as a key diagnostic for whether sentiment alone can sustain EUR/USD’s overvaluation relative to its rates‑implied path.
Absent explicit verbal intervention from either the Fed or the BoJ on the intervention front, we see further upside in EUR/USD as unlikely and favour some paring back of recent gains as the Fed brings the macro story back to the fore, prompting investors to reprice the balance of risks.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: January 26-30
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
