Dollar extends its gains
The dollar advanced again yesterday – extending the gains it made on Friday following the announcement of a new Fed Chair – supported by stronger than expected US economic data. This sees EURUSD trading close to $1.18 this morning, down the best part of 3 cents from last week’s brief high of almost $1.21. Similarly, GBPUSD is trading at about $1.3680, down about 2 cents from last week’s best levels north of $1.3850. The euro has slipped to £0.8630 versus the pound, its weakest level since late August last year. Looking to the week ahead, the ECB and Bank of England (BoE) announce interest rate decisions on Thursday while the payrolls report for January is due in the US on Friday (though it could be delayed because of the latest government shutdown). The two central banks are both expected to keep rates on hold (at 2% and 3.75% respectively), so it might be the jobs report that sets the direction for markets over the next while.
Elsewhere in markets, US government bond yields increased by 4-5bps across the curve, largely on the back of the solid (US) economic data. German yields rose by 2-3bps, while UK bonds outperformed on the day with yields nudging down by 1-2bps. The economic data helped to buoy equity markets. The S&P 500 added 0.5%, more than reversing Friday’s fall, while the Euro Stoxx 600 advanced for a second consecutive session, rising by around 1%. Asian stocks have had a positive session overnight, rebounding from a fall on Monday, which is spilling over into European markets this morning. Meanwhile, Brent crude oil prices have fallen back to circa $66 per barrel, from almost $72 p/b late last week, as Iran-US tensions abate.
Regarding the US economic data, manufacturing activity picked up strongly at the start of 2026 according to the latest ISM survey. The headline index rose to 52.6 in January, the first time it has been above the key 50 level (the expansion-contraction threshold) since early 2025, with both output and orders posting robust gains. Employment in the sector continued to fall however, albeit the pace of decline slowed from December.
The Euro area economy expanded by 0.3% q-o-q in Q4 2025 according to Friday’s flash GDP reading, a bit stronger than expected by both the consensus and the ECB (+0.2%). Over the year to Q4 the economy grew by 1.3%, in line with its average (annual) rate of growth since 2010. Separately, the unemployment rate fell to 6.2% in December, matching its all-time low in October-November 2024.
Fed Governor Waller, who dissented in favour of a 25bps rate cut at last week’s monetary policy meeting, notes that “with total inflation excluding tariff effects close to our target at just slightly above 2% and a weak labour market, the policy rate should be closer to neutral, which the median Fed participant estimates is 3 percent, and not where we are – 50 to 75 basis points above 3%.” Similarly, his Fed colleague Bowman says “absent a clear and sustained improvement in labour market conditions, we should be ready to adjust (the policy rate) to bring it closer to neutral.”
As well as the ECB and BoE meetings (Thursday) and possibly the US payrolls report (Friday), we also get the ADP employment report and ISM services survey in the US on Wednesday and a flash CPI inflation reading for January in the Euro area, also on Wednesday. A number of Fed members are scheduled to speak over the course of the week.