USD: Fed revives the macro story, dollar stays muted
The Federal Reserve held rates at 3.50–3.75% at the first policy meeting of the year yesterday. In December, we saw 9 members favouring a cut, while 3 dissented. Yesterday, the split was 10–2, with Waller and Miran the only two still in favour of a cut. Overall, there was broad consensus pointing to improvements in the US economy, including a more stable labour market and somewhat elevated inflation, both of which signalled a more cautious approach to potential future adjustments. No major surprise there. What everyone was really waiting for, however, was not the economic assessment but any remarks on the DoJ legal debacle. There was nothing on that front – boring. Investors may have expected something spicier, and because the economic update was largely anticipated, there was little dollar reaction to the upside.
Nonetheless, yesterday’s policy event was instructive. The Fed meeting served as a useful diagnostic tool. The dollar index (DXY) struggled to hold its pre‑meeting gains, suggesting that investors’ concerns over the Trump administration’s policy unpredictability continue to outweigh the resilient macro backdrop, which the FOMC stance amply validated. That said, unlike in 2025 after Liberation Day, we continue to favour a more confident move higher in the dollar as it realigns with its macro‑warranted fair value in the short to medium term, supported by a far more grounded sense of confidence in the macro outlook than was present in 2025.
The more exciting news yesterday may have been Treasury Secretary Bessent’s remarks during a CNBC interview. Nothing more than a simple “absolutely not” when asked about the possibility of the Fed joining the BoJ on yen‑intervention efforts – helped ease fears about the administration’s active attempts at weakening the currency. “The US always has a strong‑dollar policy,” he added. Whether fully meant or not, the comments carried strategic intent, calming market nerves in jittery conditions. Unsurprisingly, the remarks injected strong bullish impetus into the downwardly stretched dollar just hours before the Fed’s meeting, which failed to add much to that pre-meeting dollar’s surge.
The dollar remains offered, with the DXY sitting at the lows of the 96 handle, a region explored only three times since the start of 2025. The rising chances of another US government shutdown (triggered by Democrats’ push to curb funding for the Department of Homeland Security), along with heightened tensions with Iran over US pressure to close a nuclear deal, are clearly feeding into the softer USD sentiment that has dominated price action for more than a week now. Unless we see significant de‑escalation on either of these fronts, we doubt the greenback will make any meaningful attempt to re‑enter higher trading zones.
EUR: Technicals cool off, bullish bias unchanged
In the build‑up to the Fed’s meeting, the EUR/USD shed nearly 1% yesterday. The move lower was largely inevitable. Technicals were overstretched, with the Relative Strength Index, a key momentum indicator, sitting firmly in overbought territory. The lack of fundamental support from rate‑spread expectations also contributed to the decline. Buying impetus may have waned, also, as investors assessed the risks of a stronger euro in relation to the ECB’s policy outlook. In 2025, there were discussions that a stronger euro could prompt officials to consider the possibility of another cut should elevated levels persist, given that a strong euro is a key contributor to inflation undershooting targets.
We believe it is premature for the ECB to re‑enter that conversation, as policymakers may prefer to wait and see how euro strength evolves. We remain skeptical that levels above 1.20 will be re‑explored in the short to medium term. Yet speculation that the ECB could find itself cornered in the future may have contributed to capping upside above 1.2100. Yesterday’s remarks from ECB official Villeroy that the euro is the “element that will guide policy,” along with German Chancellor Merz’s comment that he will be watching the euro exchange rate with concern, underscored how sensitive policymakers remain to currency strength and reinforced the resistance to further EUR/USD gains. Nonetheless, We expect the pair to close the week above the 1.19 mark.
GBP: Pound riding global flows without domestic fuel
Sterling is extending its gains against the US dollar this morning after a brief pullback from four‑year highs. The dollar’s fleeting post‑Fed bounce only underscored how bearish the underlying momentum has become, and against this backdrop, the path toward $1.40 in GBP/USD is becoming increasingly plausible, even in the absence of strong domestic catalysts for the pound.
The broader GBP picture reinforces this dynamic. Sterling is weaker against every G10 currency except the US and Canadian dollars, though GBP/EUR remains steady around €1.15. As one of the more stable and less volatile G10 pairs, GBP/EUR has seen orderly price action despite the turbulence elsewhere. Our base case remains mildly bearish over the coming months, though we recognise scope for upside surprises.
Valuation signals point to GBP/EUR being broadly fairly priced, but the Bank of England presents a clear risk: the bar for dovish surprises is low, and that would weigh on sterling. The counter‑risk lies in the market’s entrenched pessimism on the UK economy. If labour‑market conditions stabilise, inflation keeps drifting lower, rate cuts become pro-growth rather than damage control. In this scenario, the UK could shift from “perennial laggard” to “undervalued recovery story,” offering a more supportive backdrop for sterling. It’s not our central scenario, but one worth considering for later this year.
That said, politics remains a notable watchpoint. GBP/EUR has a habit of reacting to domestic political noise, and the May local elections could see a fiscal risk premium re‑emerge, which potentially drags GBP/EUR towards €1.12.
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Calendar: January 26-30
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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.
