Dollar on the front foot
Some solid US economic data together with relatively hawkish Fed meeting minutes lifted the dollar yesterday. The euro and sterling ended at their lows of the day, and indeed of the week, against the US currency, at circa $1.1785 and $1.3495 respectively – they are only marginally firmer this morning – and both are now back to in and around where they ended 2025. EURGBP was little changed on the day at about £0.8730, which is at the top of the fairly narrow range of around £0.86 to £0.8750 that has prevailed in 2026 to date.
The market has pared back expectations for Fed rate cuts a bit on foot of the economic data/Fed minutes with about 55bps worth of cuts now priced in for this year (which is down from close to 65bps at the end of last week). This contributed to a modest rise in US bond yields yesterday, of the order of 3bps or so across the curve, and they have edged up a little further overnight. Elsewhere in bond markets, German and UK yields ended broadly flat on the day, though they are nudging higher at the open this morning. In equity markets, both European and US stocks had a positive session, with the Stoxx Europe 600 and the S&P 500 chalking up gains of 1.2% and 0.6% respectively.
Yesterday’s US economic data were generally firmer than expected. Manufacturing output started off 2026 on a solid footing, increasing by 0.6% on the month in January and by almost 2.5% from January 2025, while capital goods orders rose for a fourth month in a row in December, pointing to robust business investment. Incorporating these latest data, and ahead of tomorrow’s official GDP report, the Atlanta Fed estimates the economy grew by a healthy 0.9% q-o-q in Q4 2025 (or an annualised rate of growth of 3.6%), after it expanded by 1.1% (or 4.4% annualised) in Q3.
The minutes of the Fed’s January meeting suggest the bar to another rate cut anytime soon may be quite high. They noted that “the vast majority of participants judged that downside risks to the labour market had diminished,” while “most participants cautioned that progress toward the (2% inflation target) might be slower and more uneven than generally expected.” Some participants believed it would be appropriate to keep interest rates on hold “for some time”, while some others said they “would have supported a two-sided description of (the Fed’s) future interest rate decisions,” reflecting the possibility that an increase in rates “could be appropriate” if inflation remains above target.
Looking to the day ahead, economic data due include consumer confidence and construction output in the Euro area and weekly jobless claims and the international trade balance in the US. A number of Fed and ECB members are due on the wires during the course of the day.