Dollar on the back foot

The dollar was under pressure for much of last week, with a delay to Trump’s reciprocal tariffs and much softer than expected US retail sales weighing on the currency. It shed the best part of two cents (or about 1.5%) against both the euro and sterling, which hit highs for the week (and in the case of the pound, a high for 2025 to date) of $1.0515 and $1.2630 respectively during Friday’s session before easing a touch into the close of business. They are trading at around $1.0480 and $1.2590 this morning, with EURGBP – which was confined to a narrow range of £0.83 to £0.8360 last week – opening at about £0.8320. There are some important UK economic releases due this week, including Q4’24 labour market data tomorrow and January CPI inflation on Wednesday, which could have a bearing on the pound.

The weak US retail sales data contributed to the market pricing in a bit more in terms of Fed rate cuts in 2025 – about 35bps is now expected by year-end – which in turn contributed to a modest decline in US bond yields on the week. In contrast, both German (+6-7bps) and UK (+3-4bps) yields increased as the market priced in a bit less in terms of ECB and Bank of England rate cuts, with about 78bps and 56bps respectively expected over the rest of this year.

Retail sales in the US fell sharply in January, declining by almost 1% in value terms from December (and by even more in volume terms given prices rose last month). On the back of the data the Atlanta Fed lowered its estimate of the run rate for the growth in the volume of consumer spending in Q1 to 0.6% q-o-q, which is down from 1% in Q4 2024.

GDP growth in the Euro area in the final quarter of last year was revised up a touch with the latest estimate published on Friday, but was still very weak at just 0.1% (q-o-q). The pace of employment growth also slowed last quarter, to 0.1% q-o-q and to 0.6% on an annual basis, the latter a notable slowdown from 1.3% in the year to Q4 2023.

Looking to the week ahead, as well as the labour market and inflation releases, retail sales are also scheduled in the UK (on Friday), while at the end of the week flash PMIs for February are due in the main economies. The Fed releases the minutes of January’s monetary policy meeting on Wednesday, while a large number of Fed and ECB members are scheduled to speak over the course of the week.