USD: Warsh viewed as the firmer hand
Reports emerged that the Trump administration is preparing to nominate Kevin Warsh as the next Federal Reserve chairman. The pick – unlike Kevin Hassett, also a finalist – is seen as less of a surprise, given Warsh’s previous tenure as a Fed governor. His nomination may offer a sense of continuity that the Fed appears desperate for amid the recent turmoil. His preference for lower rates has also been less explicit than Hassett’s, which mildly supported the dollar’s rebound during the Asia session. We also saw stocks and Treasuries falling, reflecting market expectations of a more hawkish chairman relative to Hassett. Of course, the nomination now heads to the Senate. It will be interesting to see how the current legal battle launched by the DoJ might complicate what would otherwise be a smooth confirmation, as several Republican senators have already suggested.
Volatility has swept through global markets this week, and yesterday was no exception. Brent crude oil jumped 5% to August highs after President Trump warned Iran to accept a nuclear deal or face potential military action. That headline injected a fresh risk premium into energy markets on renewed fears of supply disruption and pressure on key shipping routes.
Tech stocks then added to the turbulence. Microsoft’s results reignited doubts over how quickly heavy AI investment will feed through to earnings, sending its share price down nearly 12% – its sharpest fall since 2020 and dragging the Nasdaq 100 almost 2% lower. The tech‑led sell‑off spilled into a broader risk‑off move globally. Under normal circumstances that would support precious metals, but after such strong rallies, traders raising cash left gold, silver and platinum exposed. All three swung sharply lower.
As for the FX market, the claims that the US dollar’s safe‑haven appeal has faded were tested. Recently, risk‑on phases have weighed on the USD as usual, while shifting perceptions around US policy stability have meant risk‑off episodes haven’t delivered the haven demand you’d typically expect. But these periods are often fleeting and correlations remain weak – and sure enough, demand for the dollar snapped back as de‑risking hit currency peers, particularly EM, while equities, crypto and precious metals all sank.
Stepping back from the noise, what stood out this week was the dollar’s muted reaction to a hawkish Fed. The broader macro and rates backdrop still points toward USD recovery, but the risk of another leg lower remains uncomfortably high amid ongoing concerns about policy unpredictability. The dollar continues to carry an elevated risk premium because investors don’t feel they can reliably price the policy path. A period where the policy environment stops generating fresh uncertainty is still needed to re‑anchor the narrative and rebuild confidence in the currency.
EUR: Pullback extends as risk off bites
Amid the latest bout of global turbulence, the euro has emerged as one of the key pressure points — buoyed by US dollar scepticism but still sensitive to risk swings.
While traders have added to expectations of ECB easing this year — pushing short‑dated German yields further below their US counterparts — that didn’t stop EUR/USD from climbing to fresh four-year peaks above $1.20 this week. Why? Because investors have been turning away from the dollar amid policy uncertainty and rotating into liquid alternatives such as the euro and gold.
That said, yesterday’s price action was a reminder not to write off the dollar’s safe‑haven role when global risk aversion bites. EUR/USD has now pulled back around 1.4% from its four‑year high. For euro bulls, the silver lining is that the 14‑day Relative Strength Index has slipped out of overbought territory, suggesting this may be a healthy correction rather than a trend break.
On the macro side, the European Commission’s economic sentiment indicator improved in January, pointing to a firmer start to the year. Confidence rose across most sectors, with manufacturing continuing its gradual recovery as production expectations moved above their long‑term average despite soft export demand. Inflation expectations eased but remain elevated. There’s little urgency for the ECB to act, though the dollar’s recent weakness will be watched closely by the more dovish voices on the Governing Council.
GBP: Sterling caught in the risk-off squeeze
Sterling weakened yesterday as risk‑off sentiment returned, with ballooning AI‑related expenses from major tech firms reported this week unsettling markets about the promised ROI. The scale of AI investment has sharpened sensitivity around earnings season, triggering broader equity pullbacks when CAPEX figures surprise to the upside.
As stocks fell, flows rotated into safer assets such as gilts and Bunds, pushing yields lower and adding pressure on sterling through the rate‑differential channel. That move was compounded by GBP’s pro‑cyclical nature: the currency typically underperforms in risk‑off environments as investors rotate toward safer havens. This week, GBP traded largely at the mercy of global trends. GBP/USD rose on softer US sentiment, breaking above the key 1.38 mark, while GBP/EUR moved more cautiously. In periods of US‑driven global uncertainty linked to the administration’s unpredictable policy style, GBP/EUR has tended to behave less one‑sidedly in favour of the euro compared with the post‑liberation‑day period.
Attention now shifts to the domestic front with the first BoE meeting of the year next week. A hold is widely expected, but the vote split will matter more than the headline decision as markets try to gauge the medium‑term path for an MPC that remains deeply divided.
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.
