USD: Economic resilience meets hawkish Fed minutes
The recent wave of economic releases suggests the American economy finished the year on a surprisingly high note, with December and January data across housing and manufacturing consistently beating expectations. Most notably, housing starts surged to over 1,404k units and industrial production for January expanded by a robust 0.7%, significantly outpacing the initial consensus forecast. These developments have created clear upside risk for fourth-quarter growth projections; the Atlanta Fed GDPNow estimate has climbed toward 3.7%, sitting well above the earlier 2.6% forecast and the more conservative Blue Chip consensus. This broader economic engine is running much hotter than previously anticipated, driven largely by a resurgence in manufacturing and heavy investment in the technology sector as companies continue to funnel capital into artificial intelligence infrastructure.
This underlying strength has prompted a notable shift in tone from the Federal Reserve, as today’s minutes skew decidedly hawkish. While lingering worries about persistent inflation remain, there is a marked decrease in concern regarding the labor market. Most significantly, the record of the January meeting showed that several participants supported a “two-sided description” of the committee’s future interest-rate decisions. This indicates that if inflation remains at above-target levels, the Fed is prepared to consider upward adjustments to the target range for the federal funds rate, rather than just maintaining or cutting them. This policy pivot suggests that the central bank is prepared to lean against the current growth momentum if it threatens price stability.
The Fed’s focus on persistent inflation aligns with the durable domestic demand seen in recent hard data. While soft retail sales in December initially raised some eyebrows, the broader shift toward service consumption suggests that the consumer remains resilient. If the trade deficit narrows as some economists now expect, manufacturing gains and steady service spending could provide the additional momentum needed to carry this economic strength deep into 2026. This backdrop of resilient growth has also provided a steady floor for the U.S. Dollar, which has trended higher as investors weigh strong domestic data against a more stagnant global environment.
The volatility of the currency market was further addressed in the minutes, which confirmed the much-speculated Japanese yen “rate checks” from January. The Desk noted that these requests for indicative quotes were made solely on behalf of the U.S. Treasury, acting in the New York Fed’s role as fiscal agent. Despite these fundamental strengths and clarified policy stances, the reaction in equity markets has been characterized by significant internal volatility and cautious positioning from large speculators. Even though the S&P 500 remains relatively flat for the year, this surface-level stability masks massive dispersion. Professional traders have maintained net short positions on futures since the start of 2025, showing a persistent skepticism that contrasts with the improving growth narrative but aligns with the Fed’s renewed willingness to hike rates if necessary.
EUR: EUR/USD drifts lower on re-asserted Fed hawkishness
We heard from ECB official François Villeroy yesterday. He stressed that the high levels the euro is navigating against the dollar are being closely monitored by the ECB. And that, in his view, risks of inflation undershooting appear greater than those of overshooting as a result. Earlier in the month, January’s inflation figures eased broadly – headline at 1.7% y/y (1.9% in December) – inevitably bringing Villeroy’s dovish concerns into sharper focus. On the strong euro issue, as the Bank does not operate with a fixed exchange‑rate target, calling out specific levels that would trigger additional easing from the ECB appears unwarranted. If we really had to, a breach of the 2021 high at 1.2349 – which would invalidate the long‑term bearish downtrend in EUR/USD – may serve as a useful diagnostic marker, although we see this as highly improbable given where the medium-term balance of risks currently sits.
Overall, the backdrop still carries a hint of dovishness, with rates markets beginning to pay attention to the undershooting‑risk narrative, with overnight index swaps now implying a ~40% chance of a cut by November 2026 – the highest across the ECB calendar and a striking shift given that, as recently as December, that meeting still carried some probability of a hike.
EUR/USD was largely indifferent to the official’s dovish remarks, instead drifting lower on the back of a gradual recovery in the greenback supported by firmer US macro data. The move was reinforced by hawkish January Fed meeting minutes, released at 19:00 GMT yesterday, which helped push the pair below the 1.18 mark. The price action clearly points to a fast‑improving US macro narrative reasserting itself in the dollar’s direction of travel.
For the remainder of the week, we expect the pair to hover around the 1.18 level, with a risk of slipping further on a hawkish PCE price index release tomorrow. Should the release reinforce the still-hot inflation concerns highlighted in the minutes, we see EUR/USD firming below the 1.18 mark into next week. That said, we think more US data will be needed before the pair can re‑adopt the familiar 1.15–1.18 range‑bound behaviour we have repeatedly flagged.
GBP: Hoping for some retail therapy
GBP/USD has found some temporary support at the 50‑day moving average (1.3528) after sliding more than three cents from its late‑January peak, but the structure still looks fragile. The pullback in cable is being driven less by a clear macro shift and more by an unwinding of stretched short‑USD positioning, leaving the pair vulnerable, especially after the run of softer UK labour market and inflation data this week. Rate expectations have shifted meaningfully: money markets now fully price a 25bp BoE cut by April, with better‑than‑even odds of a move as early as March, and two cuts fully priced by November. That repricing has dragged UK yields lower — 10‑year gilts are at their weakest levels since mid‑January — eroding sterling’s yield appeal and keeping the bias tilted to the downside.
GBP/EUR slipped through the 100‑day moving average yesterday — a level that had acted as reliable support since December — and also closed below the recent higher low at 1.1440. That combination effectively breaks the steady uptrend in place since November and leaves the cross looking more exposed to downside risks, especially after the run of softer UK labour market and inflation data this week. It doesn’t necessarily signal a full bearish reversal, but it does underline how quickly sentiment around sterling has deteriorated.
UK retail sales are back in focus on early Friday morning after the previous release surprised to the upside. Last time, this offered the pound some support by briefly pushing back against the narrative of a weakening consumer and tempering near‑term BoE easing expectations. The question now is whether that resilience was a one‑off. Markets are primed to trade weak UK data more aggressively than strong data, so any softening in the headline or underlying trend would emphasise rate‑cut bets and weigh on GBP.
Composition will matter too: last month’s gain was driven largely by online spending, and any reversal there — or renewed weakness across core categories — would signal that momentum remains fragile. With the consumer still the soft spot in the UK outlook, this print carries more weight than usual for sterling.
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Calendar: February 16-20
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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.
