Market Commentary

Friday’s softer than expected US inflation data didn’t have much effect on the main currency pairs, though they did contribute to a firming of Fed rate cut expectations and an extension of last week’s decline in bond yields. The yen was the star performer in FX last week – gaining around 3% and 2.5% against the dollar and the euro respectively – as it benefited from the decisive result in Japan’s recent election. The dollar also lost some ground to the euro and sterling, shedding a bit less than half a percent against both to end the week at about $1.1870 and $1.3650 respectively. EURGBP was broadly flat on the week at around £0.87. There are important UK economic data due this week, namely the labour market report for Q4 2025 on Tuesday and CPI inflation for January on Wednesday, which may have an impact on market expectations regarding the timing of the next cut in Bank of England interest rates and, hence, on sterling as well.

Yesterday’s Events

Following Friday’s inflation data, the market is now pricing in almost 65bps worth of Fed rate cuts this year, the most it has done so in 2026 to date. The firming of rate cut expectations post the inflation data contributed to a further decline in US government bond yields, which fell by 10-16bps on the week. Weakness in equity markets, particularly US stocks, also contributed to lower yields generally last week, with German and UK bonds both registering a decline in yields of 5-10bps across the curve. Regarding equity markets, the Nasdaq shed more than 2% and the S&P 500 lost around 1.5%, while the Stoxx Europe 600 was flat on the week.

Headline CPI inflation in US came in a bit lower than expected in January at 2.4%, down from 2.7% in December. Core inflation – which excludes energy and food prices – was in line with expectations at 2.5%,  down from 2.6% in December. Within core inflation, goods inflation fell to 1.1% in January from 1.4% the previous month, while core services inflation dipped to 2.9% from 3%.

The Euro area economy grew by 0.3% q-o-q in the final quarter of 2025 according to the second GDP estimate published on Friday, unchanged from the flash estimate and the same as the Q3 outturn. On an annual basis, GDP grew by 1.3% in Q4 and averaged 1.5% growth for 2025 as a whole, a notable acceleration from 0.8% in 2024. Employment also continued to rise into year-end, increasing by 0.2% q-o-q in Q4, following an increase of 0.2% as well in the third quarter, and by 0.6% on a y-o-y basis.

The Day Ahead

Looking to the week ahead, as well as the UK labour market and CPI inflation data (on Tuesday and Wednesday respectively), other data of note due include Q4’25 GDP and PCE inflation for December in the US on Friday, and flash PMIs for February in the main economies, also on Friday. The Fed and ECB publish the minutes of their most recent monetary policy meetings on Wednesday and Thursday respectively, while a large number of Fed and ECB members are scheduled to speak over the course of the week.

Market Commentary

It was relatively uneventful in FX markets yesterday with the main currency pairs ending little changed from Wednesday’s closing levels. It may be that they are treading water ahead of today’s CPI data in the US, though given the (largely) non-response to the much stronger than expected US jobs report earlier in the week, it might take an ‘off the charts’ inflation reading to move them to any great extent! In any case, ahead of the data, the euro and sterling are trading at about $1.1860 and $1.3620 against the dollar respectively while EURGBP continues to hover around the £0.87 level.

Yesterday’s Events

A sharp sell-off in equity markets together with some weaker than expected economic data out of the US – the number of new jobless claimants fell by less than forecast last week and second-hand homes fell by more than forecast in January – contributed to a 6-7bps decline in US government bond yields, while German and UK yields were both marginally lower on the day (they are edging down again at the open this morning). The Nasdaq led a decline in US stocks, shedding 2%, while the S&P was off 1.6%. European indices fell by around half a percent and are on track to outperform their US peers this week, as indeed they have done in 2026 to date.

Bank of England MPC member Breeden, who dissented in favour of a 25bps reduction in interest rates at this month’s monetary policy meeting, says she “wasn’t confident that we’re going to see a pickup in (economic) activity and so I thought it was appropriate for us to provide a bit more support for the economy,“ adding that “it’s reasonable to expect there to be a (rate) cut over the next couple of meetings.” The market sees a circa 70% chance of a quarter-point cut at next month’s meeting and is more or less fully priced for such an outcome at the following meeting in April.

ECB Governing Council member Makhlouf says he is “not ruling out” a further reduction in interest rates, nor is he “ruling out the possibility that interest rates could also go up”, which clearly indicates a neutral monetary policy stance. He notes that “at the moment it does look as if inflation is on track to deliver our (2%) target,” hence interest rates are currently “in a good place.”

The Day Ahead

As indicated, the main economic data release today is the January CPI report in the US. The consensus expects both headline and core consumer prices to have risen by 0.3% last month (versus December), while would push the annual rates of inflation down to 2.5% for both, from 2.7% and 2.6% respectively in December. Euro area data due include a 1st estimate of employment growth, and a 2nd estimate of GDP growth, in Q4 2025 (the initial GDP estimate showed the economy expanded by 0.3% q-o-q, ahead of expectations). On the central bank front, BoE MPC member Pill and ECB Vice-President de Guindos are scheduled to speak during the course of the day.

Market Commentary

Yesterday’s US jobs report was a good deal stronger than expected – the economy added a larger than forecast 130k jobs in January and the unemployment rate nudged down for a second month running – prompting a paring back of Fed rate cut expectations, with the market more than pricing out what it had priced in following Tuesday’s weaker than expected retail sales data. The reaction in FX to the data was fairly muted however. The dollar chalked up very modest gains against the euro and sterling (relative to the levels prevailing just before the release of the data) and, following a brief spike higher, resumed its descent against the yen. EURUSD and GBPUSD are trading at $1.1875 and $1.3635 respectively this morning, while EURGBP remains just above £0.87. GDP data for Q4 2025 in the UK released a short while ago were a little softer than expected, but with little impact on the pound so far.

Yesterday’s Events

The market has pushed back out the timing of the next Fed rate cut to July following the jobs data, from June, and now sees about 50bps worth of cuts in total this year, versus circa 60bps previously. This contributed to a rise in US bond yields yesterday, with 2-year yields increasing by about 6bps and 10-year year yields up around 4bps. German and UK yields, meanwhile, were marginally lower on the day. In equity markets, both US and European stocks ended the day largely unchanged.

The UK economy grew by just 0.1% q-o-q in the final quarter o 2025, according to this morning’s GDP release, the same as in Q3, with consumer spending increasing again in the quarter but business investment and exports both declining from Q3. On an annual basis, GDP was up 1.0% on Q4 2024 with growth for 2025 as a whole averaging 1.3%, up slightly from 1.1% in 2024. The economy finished 2025 on a soft note too, with the monthly data showing GDP up 0.1% in December (from November).

The US economy added 130k jobs in January, well ahead of expectations (+68k), following an increase of 48k in December, while over the three months to January employment growth rebounded to +73k a month from -45k a month over the three months to October. The unemployment rate fell for a second month in a row in January, to 4.3%, despite an uptick in the labour force participation rate, while y-o-y hourly earnings growth was unchanged at 3.7%. Overall, the data underscore the Fed’s view that the labour market is stablising, suggesting it will sit on its hands for a while now as far as interest rates are concerned.

The Day Ahead

Looking to the day ahead, it is pretty quiet on the economic data front with weekly jobless claims and second-hand home sales due in the US. There a few Fed and ECB members scheduled to speak over the course of the day.

Market Commentary

While yesterday’s US economic data, including retail sales, were softer than forecast, prompting a firming of expectations for further Fed rate cuts, the dollar had something of a mixed performance. It shed another 1% or so against the yen, which continued to build on its post-election gains, but treaded water for the most part against the euro and sterling. Ahead of today’s key jobs report in the US, which will further shape expectations for Fed policy, EURUSD and GBPUSD are trading at around $1.19 and $1.3680 respectively, both largely unchanged from yesterday morning’s levels. EURGBP isn’t doing much either as it continues to hover just above the £0.87 level.

Yesterday’s Events

Following yesterday’s economic data, the market now sees about a 50% chance of a 25bps rate cut at the Fed’s next but one meeting in April and is fully pricing in a cut at the June meeting. US bond yields fell as rate expectations firmed, declining by 4-7bps across the curve. German and UK yields were also generally lower on the, by around 2-4bps. The soft US economic weighed a little on equity markets, with the S&P 500 and the Stoxx Europe 600 both ending the day marginally in the red.

US retail sales were a good deal weaker the forecast, coming in flat in December (versus an expected increase of 0.4%) having risen by 0.6% in November. Post the data, the Atlanta Fed has lowered its estimate of the ‘run rate’ for the growth in overall consumer spending (including spending on services) in Q4 2025 to 0.6% (q-o-q), which compares to growth of 0.9% in the third quarter of last year.

The other notable US data release yesterday was the  Employment Cost Index (ECI) for Q4 2025. It rose by 0.7% q-o-q, versus +0.8% expected, with the y-o-y increase easing to 3.4%. The latter is above the average rate of increase in employment costs that prevailed in the years immediately preceding the pandemic, but is in line with the pre-global financial crisis period in the 2000s, and hence (more) consistent with meeting the Fed’s 2% inflation target once the impact of higher tariffs washes out of the current inflation readings.

The Day Ahead

For today, the key economic data release is the employment report for January in the US. The consensus expects the economy to have added circa 65k jobs last month, following +50k in December, with the unemployment rate expected to remain steady at 4.4% and the y-o-y growth in hourly earnings seen easing to 3.7% from 3.8%. There’s little or nothing of note date-wise due elsewhere, while a few Fed and ECB members are due on the wires over the course of the day.

Market Commentary

The dollar lost more ground yesterday amid a continuing rally in equity markets. The euro and yen both rose by almost 1% against the US currency, while sterling strengthened by just over half a percent, most of its gains coming after under pressure UK Prime Minister Keir Starmer received the backing of his cabinet colleagues. EURUSD and GBPUSD are trading at around $1.19 and $1.3670 respectively this morning, while EURGBP continues to hover just north of £0.87. We may now see some consolidation in FX markets ahead of the key jobs report in the US tomorrow, although there are some other US data, including retail sales today, to be negotiated before then.

Yesterday’s Events

Equity markets extended Friday’s gains. The Nasdaq led US indices higher, gaining almost 1%, while European stocks added around 1%. Asian stocks have had another positive session overnight with Japan’s Nikkei up a further 2% or so. In government bond markets, UK yields reversed an early increase to finish largely unchanged, while US and German and US yields were both broadly flat on the day. Japanese yields were lower overnight, reversing a modest post-election increase in the previous day’s session.

ECB member Kazimir says “it would take a major departure from our baseline (economic) scenario for me to consider recalibrating our (monetary) policy setting,” adding that “when I look at inflation, the overall situation remains balanced.” Similarly, in remarks to the European Parliament, Christine Lagarde reiterated that inflation is expected “to stabilise sustainably at our 2% medium term target,” with headline inflation expected to average 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028.

The Day Ahead

Looking to the day ahead, there are a number of US economic data releases due including the ADP weekly employment report, the small business optimism index for January, December retail sales, import prices for December, and the Q4 2025 Employment Cost Index (ECI). There are also a couple of Fed members scheduled to speak over the course of the day.