Dollar Finds Its Feet on Fed Minutes

The dollar reclaims its position amongst major currency pairs as US data defies gravity. Meanwhile, leadership whispers haunt the euro, and the pound yields to the cold reality of a central bank ready to pivot.

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GBP: Sterling hits four-week low as BoE cut bets increase

GBP/USD hit 1.3486 on Wednesday, a four-week low, as two forces landed in the same session. The UK CPI fell to 3.0% YoY in January, in line with forecasts, and then the FOMC minutes arrived and did the heavier work. The pair initially held at 1.3566 post-CPI , then dragged down to the 1.35 handle as the dollar caught a fresh bid. A decent domestic number, swallowed whole by a bigger external story.

The inflation print strengthened the case for a near-term Bank of England (BoE) rate cut. Traders now price an 85% chance of a 25bps cut at the March meeting. However, the "sticky" core stays with services inflation. The BoE’s closest read on price pressure slipped just one tick, from 4.5% to 4.4%, missing the 4.3% forecast. That is not the clean softening the doves needed.

Policy divergence drives the move. UK disinflation strengthens the case for BoE easing, while the Federal Reserve (Fed) signals patience. That gap keeps pressure on sterling in the near term.

Political noise adds a layer of risk; the upcoming by-election in Greater Manchester next week could reopen questions over Keir Starmer's leadership if Labour drops a seat it won with over 50% of the vote in 2024. A Labour defeat would likely intensify pressure on both sterling and gilts.

A widening divergence between a softening BoE and a hesitant Fed creates a specific window of volatility. Volatility across GBP pairs has picked up as rate expectations shift. Periods like this often coincide with increased hedging activity among corporates and investors managing sterling exposure.

Key technical levels for GBP/USD: support at 1.3463 and 1.3431; resistance at 1.3554 and 1.3613.

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EUR: Euro Rattled by Lagarde Exit Rumours

EUR/USD traded near 1.1790 in the early session, up 0.7% on the day but short of the 1.1800 handle. EUR/GBP ticked to 0.8742, +0.11%. The session told two stories: a broader dollar bid already in motion, then a political jolt specific to the single currency.

Reports surfaced that ECB President Christine Lagarde plans to step down before the end of her term, timed to allow outgoing French President Emmanuel Macron a say in naming her successor ahead of France's 2026 presidential election. The European Central Bank (ECB) pushed back the same day. It confirmed no decision had been taken, and Executive Board member Piero Cipollone told reporters he had “no news” of an early departure.

The reaction in FX markets was real regardless. Lagarde's tenure covered the ECB's most aggressive tightening cycle in a generation with rate hikes through 2022 and 2023 that brought inflation back to target.

Though the ECB denies a firm decision, it still adds a political risk premium to the euro. The mere suggestion of a leadership vacuum creates a tactical "sell" sentiment. While macro data usually dictates the path, the identity of the President matters for policy continuity. This uncertainty, paired with a robust US dollar, creates a bearish skew for the single currency.

Still, the broader macro backdrop matters more. Inflation sits close to the ECB’s target and rate expectations point to an extended hold through 2026. Unless the leadership story develops further, the near-term direction of the euro will likely track incoming data and relative rate expectations.

Political headlines often create "noise" that moves spot prices faster than economic fundamentals. The event-driven volatility in EUR pairs has increased. Episodes tied to central bank credibility often coincide with adjustments in positioning across the curve and in FX exposures.

Key technical levels for EUR/USD: support sits at 1.1756 and 1.1731; resistance at 1.1833; Bias: Near-term skew softer versus the dollar.

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USD: The Dollar Dominates on AI and Fed Grit

The US dollar surged, with the DXY Index rising to 97.75, marking its third consecutive advance and the sharpest daily gain since late January. The Greenback capitalised on a "double-whammy": blockbuster economic data and hawkish Fed minutes that cooled hopes for imminent easing.

The US manufacturing sector is experiencing a renaissance, likely fuelled by the AI investment boom. Non-defence capital goods orders rose 0.6%, beating the 0.4% forecast. Manufacturing output also jumped 0.6%, the best performance since early 2025. Housing starts reached a five-month high. These prints, stacked on top of a hawkish Fed tone, built a dollar that looks settled in the near term.

Simultaneously, FOMC minutes revealed a committee in no rush to cut. FOMC minutes from the 27-28 January meeting. The committee held the policy rate at 3.5-3.75%, with only two of twelve members favouring an immediate cut. Several members even suggested rate hikes if inflation stays stubborn.

Odds of a rate cut sit below 50% through the June meeting, the first after Jerome Powell's term concludes in May. The new chair faces a divided committee on policy direction. With the market only pricing one or two 25bps cuts for the entirety of 2026, the dollar finds itself in a position of yield superiority. Relative policy expectations continue to anchor the dollar in the near term.

Shifts in US rate expectations often coincide with broader repositioning across G10 FX. The latest data cycle has reinforced the dollar’s near-term support profile.

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Global Ripples: Antipodeans and the Yen

The NZD/USD pair suffered its steepest drop since last April, falling under $0.60 after a cautious central bank update. The JPY retreated to $154.78, moving away from the 152 level seen after Prime Minister Takaichi’s victory.

Geopolitical tension in the Strait of Hormuz and stalled Russia-Ukraine talks have triggered a "safe-haven" bid. This flows directly into gold, oil, and the US dollar. In Japan, the focus shifts to whether the state uses FX reserves to guarantee loans rather than letting the yen slide further. This "liquidity concentration" into the dollar during times of crisis is the dominant theme for the minor pairs.

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Market Look Ahead;

Fri 20 Feb :

US GDP Q4

Japan National CPI

Eurozone & Germany Flash PMIs

Global PMI data

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