Is the Pound's Recovery Already Stalling? What's Next for the Euro and Dollar?

Impact on GBP: GBP faces limited upside amid Fed hawkishness

GBP/USD extends the recovery to near $1.2440 during the early European session on Monday. However, the potential upside seems limited amid the Federal Reserve's (Fed) hawkish stance. Later on Monday, investors await the Fed’s Governor Lisa Cook speech for more cues about the US interest rate outlook this year.

GBP/EUR remains above the €1.2000 support level, reinforcing it as a near-term base likely to hold firm.

As the first full trading week of 2025 begins, technical indicators are largely neutral, with higher trading volumes and fresh economic data expected to shape the market after the holiday lull.

Since December 20, GBP/EUR has traded within a narrow range of €1.2016 to €1.2100 amid reduced activity. This creates a relatively static outlook, with the nine-day Exponential Moving Average (EMA) flat at €1.2060, near the current spot rate and aligned with the 21-day EMA.

No Major Data.

Impact on EUR: Looking for a lifeline

EUR/USD gained some ground on Friday, as anticipated. From a valuation perspective, there is still short-term upside potential, with the pair currently reflecting a risk premium of approximately 1.5-2.0%.

However, the modest re-tightening of the EUR:USD short-term swap spread may not be enough to sustain a move back to the $1.0400 level. Without positive developments in the Eurozone growth outlook, any rebound in EUR/USD is likely to be short-lived, with risks skewed towards the $1.0200 area in the coming weeks.

Rising gas prices following the Ukraine pipeline shutdown, combined with growing protectionism concerns, add further pressure on the Euro. This week’s focus will shift to December inflation data, with Eurozone CPI expected to rise from 2.2% to 2.4% and core inflation remaining at 2.7%. A significant upside surprise could challenge market expectations of four ECB rate cuts this year and provide some stabilisation for the Euro.

No Major Data.

Impact on USD: The rally could slow down

The Christmas period was quiet for FX markets, but the Dollar stayed resilient, defying seasonal weakness and a brief rally in US Treasuries. The new year began with renewed Dollar strength, pressuring European currencies.

As normal market conditions resume, improved FX liquidity may ease the Dollar’s momentum, aligning it with a slightly weakened rate advantage. While technicals suggest the rally may be overextended, Trump’s upcoming inauguration and strong January-February seasonality should sustain Dollar support.

This week’s focus shifts to data. The hawkish December FOMC raised the bar for Dollar weakness, with steady rate cut expectations (12bp for March, 17bp for May, 25bp for June). Renewed inflation concerns from FOMC members Daly and Kugler further bolster the Dollar.

Friday’s US jobs report is key, with payrolls forecast at 140k and unemployment at 4.2%, aligning with gradual labour market cooling factored into the Fed’s 2025 rate cut projections. Other key releases include JOLTS data, ISM services, and FOMC minutes.

Technicals suggest a pause, but strong dip-buying should keep the DXY target of 110.0 within reach.

No Major Data.

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