Dollar still under pressure

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.

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.

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.