The Pound Stays Poised as Policy Cracks Widen

Sterling trades steady near recent highs as BoE rhetoric pushes back against Fed easing bets. The euro stays rangebound after softer inflation prints, while the dollar index slips as Fed officials double down on patience. Yen firms on renewed BoJ tightening signals, and the Aussie draws support from hotter CPI.

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GBP: The BoE Refuses to Follow the Fed's Lead

The pound maintains a precarious hold above 1.3550 level against the dollar while softening against the euro. Sterling opened at 1.3556 against the dollar on Thursday, one pip from Wednesday's close of 1.3559.

Bank of England (BoE) policymaker Megan Greene recently shattered the assumption that global banks must move in lockstep. In an assertive editorial, she argued that the BoE could potentially do "exactly the opposite" of the US Federal Reserve (Fed). This headline sparked immediate friction in sterling crosses as traders recalibrated the UK’s standalone inflation path.

We are witnessing a decoupling of domestic mandates. Greene suggests that setting UK policy based on the risk of Fed surprises lacks logic. Instead, she warns that premature Fed cuts could actually export inflation to the UK, necessitating a "more restrictive" stance from the BoE to compensate. This structural hawkishness provides a floor for sterling, yet political gravity pulls from the other side.

Today’s by-election in Manchester Gorton and Denton serves as a litmus test for Keir Starmer’s leadership. A poor showing for the government typically invites sterling weakness as political stability premiums evaporate.

Current price behaviour reflects policy divergence rather than broad risk sentiment. Periods like this often coincide with more active risk management flows across GBP exposures.

Key technical levels for GBP/USD: Resistance sits at 1.3600, 1.3675 and Support at 1.3480, 1.3350; Bias: Holding above 1.3480 keeps upside pressure intact

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EUR: Euro Holds Ground but Lacks Spark

EUR/GBP opened at 0.8710, a fraction above Wednesday's close of 0.8709, before edging up to 0.8727 through the session. UK political uncertainty provided a quiet bid on the euro side of the cross.

Eurozone inflation eased to 1.7% YoY in January, a 16-month low and the softest reading since September 2024. That data point feeds expectations of a more accommodative ECB. A politically uncertain Westminster and a data-driven dovish Frankfurt: EUR/GBP sits between two sources of downward pressure with different origins. ECB President Christine Lagarde speaks later today, and her tone on the pace of future easing will set the cross's direction into Friday.

January's Eurozone Harmonised Index of Consumer Prices came in at -0.6% MoM, down from -0.5% previously. Core HICP printed at -1.1% MoM and 2.2% YoY, both in line with forecasts and unchanged from the previous reading. The data confirms disinflation progress but not enough to force immediate ECB action. The ECB is widely expected to hold rates through 2026.

The EUR/GBP pair now trades on a mix of UK political risk and eurozone disinflation. Such two-way drivers often coincide with higher hedging activity across EUR/GBP exposures.

Key technical levels for EUR/GBP: Resistance sits at 0.8745, 0.8780 and Support at 0.8700, 0.8680, 0.8625; Bias: Gradual upside while above 0.8680, break above 0.8745 could extend toward 0.8780

The euro sits in a tight corridor near 1.1818 against the dollar, as traders wait for a fresh Euro catalyst to drive direction. The euro sits between two gravitational pulls: soft domestic inflation pointing to a patient central bank and a dollar under its own pressure.

Current pricing suggests investors expect the ECB to hold policy steady through much of 2026. Without a fresh inflation surprise, EUR/USD lacks momentum. Range behaviour in EUR/USD typically coincides with more selective positioning rather than broad directional flows.

Key technical levels for EUR/USD: Resistance sits at 1.1865, 1.1920 and Support at 1.1760, 1.1690; Bias: Range unless 1.1865 breaks

Friday’s German CPI reading is the next major hurdle; any further cooling in Europe’s largest economy is likely to force the ECB’s hand, exerting downward pressure on the euro and its pairs.

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USD: The Supreme Court and the "Coin Flip"

The dollar index (DXY) fell to 97.59 on Thursday, a level that reflects accumulating uncertainty rather than conviction in either direction.

The Fed has entered a period of "monetary indecision." The federal funds rate sits in a target range of 3.5% to 3.75%, unchanged since the FOMC cut on 10 December 2025. Governor Christopher Waller, who dissented in January in favour of a 25 bps cut, now openly labels the March 18 rate decision a "coin flip," pending more data, indicating no urgency.

Chicago Fed President Austan Goolsbee wants a return to ease in policy, but not before inflation tracks convincingly toward 2%. Kansas City Fed President Jeffrey Schmid is direct: inflation has run "closer to 3% than to 2%" for the past year, and the job is not finished. He called inflation "an economic thief" and "worse for the bottom half of the wage-earning public." St. Louis Fed President Alberto Musalem describes policy as "neutral in real terms," balanced across competing risks. Governor Stephen Miran joined Waller in dissenting for a cut in January but they are in the minority.

Tariff uncertainty adds another layer. The US Supreme Court struck down President Trump's emergency tariff authority last Friday. US Trade Representative Jamieson Greer confirmed on Wednesday that tariff rates for some countries will rise to 15% or above from the current 10%. The administration navigates a legal and strategic reset on trade, injecting fresh uncertainty into dollar-related positioning across the board.

Fed Governor Lisa Cook highlighted a longer-run variable worth noting: AI productivity gains could complicate the Fed's framework in ways that are not yet quantifiable. A productivity boom that also raises unemployment creates a genuine dilemma for the Fed between its two mandates. Cook noted that the current neutral rate may already be above pre-pandemic levels, a consideration that has not yet fully priced in.

Today's initial jobless claims print arrives with a consensus expectation of 215,000, against last week's 206,000. A reading above consensus would point to softness in the US labour market. The four-week average carries more signals than any single week's figure; it is the trend that participant flows tend to track.

Policy uncertainty extends beyond macro data. For now, consensus inside the FOMC favours holding steady.

The dollar is currently caught between a resilient economy and a cautious central bank. This "wait-and-see" posture from the Fed often leads to sharp, reactive moves once a consensus forms. High-frequency data like today's jobless claims can shift the "coin flip" overnight. Periods of policy hesitation often coincide with increased FX volatility.

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Global Pairs: Atomic Tensions and Antipodean Heat

The Aussie dollar climbed to $0.7129 after January CPI data exceeded forecasts. With core inflation hitting year-long highs, the "Aussie" benefits from a market betting on a "higher-for-longer" RBA stance.

The yen strengthened past $156.00 after Governor Ueda hinted at a near-term rate hike. Despite political pressure from pro-stimulus figures like Sanae Takaichi, the BoE's shift toward normalisation suggests the era of the "cheap yen" faces a structural challenge.

The US Treasury’s crackdown on Iran’s "shadow fleet" and ballistic production keeps oil-sensitive currencies on edge. Sanctions on 30 individuals and entities remind us that geopolitical shocks still continue to be the ultimate "black swan" for FX markets.

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Current Rate Table

(rates as at the time of writing)

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Market Look ahead

Thursday, 26 Feb:

EUR: ECB President Lagarde Speech

USD: Initial Jobless Claims

GBP: Manchester Gorton and Denton By-election

Friday, 27 Feb:

GBP: GfK Consumer Confidence

EUR: France CPI & Germany Unemployment Change

USD: PPI

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