Sterling Dips Ahead of BoE Decision
- Feb 6
- 3 min read
Updated: Feb 10
GBP : Sterling may concede recent gains
Since mid-January, the trade-weighted Sterling index of the Bank of England has increased by 1.7%. The surge in US Treasuries has helped to boost the recovery from the January sell-off driven by gilt. Furthermore, the current emphasis on tariffs has hurt the Euro because the UK is less vulnerable and, if this week's remarks are correct, may even be granted a tariff exemption by the Trump administration.
However, if US Treasury yields continue to rise, the external environment may become less favorable. Investors should be able to return their attention to the UK's fiscal and monetary outlook during the brief respite in tariff talks. March will be dominated by fiscal policy, but today's Bank of England meeting brings monetary policy back into the spotlight. A 25 basis point cut is widely expected.
With a strong case for a climb toward $1.1900/1.2000 later this year, the GBP/USD exchange rate is predicted to top this quarter at roughly $1.2500/1.2600.
EUR : Some renewed attention on Ukraine
The state of affairs in Ukraine is a major wild card for EUR/USD this year. A fresh increase in Ukraine's hard currency bonds was noted by the foreign exchange market yesterday. Ukraine's foreign bonds rose by about two points in value (a 3-4% daily return), according to EM Sovereign Strategist James Wilson, as there was increasing hope that talks would advance a possible peace agreement.
Positive triggers have included reports that the US may present a peace plan at the Munich Security Conference next week and signs that both sides are easing their position on negotiations. After consistent increases since mid-2024, the nation's GDP warrants touched their greatest levels since January 2022, while last year's restructured bonds hit their highest price since issuance. Next week, these developments will be keenly monitored and may offer some support to the EUR/USD exchange rate.
Whether tomorrow's US jobs report will momentarily move EUR/USD back toward the $1.0530/70 range is the main question. Although this is feasible, most people don't think gains beyond $1.0500 will last for very long. As further US tariffs take effect, there is still a persistent anticipation that the price will decline toward $1.0200 later this quarter, with $1.0000 most likely in Q2.
We anticipate that the EUR/USD exchange rate will remain between $1.0370 and $1.0450 today. It is unlikely that the December Eurozone retail sales and the remarks made by ECB speakers Vujic and Nagel would have a significant impact on the market.
USD : Dollar bull trend situation
Investors are wondering if another 1% to 2% drop is necessary, as the DXY Dollar index is presently around 2% below its recent highs. This correction has been caused by a number of variables, but the tariff developments this week are perhaps the most important. Although this strategy may change in the second quarter, it seems the Trump administration has been utilizing tariffs as a transactional instrument rather than for ideological purposes.
The drop in 10-year US Treasury yields below 4.50%, which was facilitated by yesterday's well-received Quarterly Refunding announcement, has been another significant factor. As statistics and Bank of Japan commentary continue to support expectations for BoJ tightening this year, the decline in the USD/JPY has also garnered attention.
Whether the DXY continues to decrease by another 1% to 2% will probably depend on tomorrow's employment statistics. Soft US JOLTS job openings data earlier this week put pressure on the dollar, indicating that dismal numbers would exert pressure once more. We do not, however, anticipate that the dollar correction will persist for very long. The rates team at ING thinks that US Treasury yields are unlikely to drop much further, and that more expansive and structural tariffs might return in Q2. Although we view this as a floor for the first quarter, a weak NFP report tomorrow would cause DXY to decline toward the 106.35/50 level. The US economy has a light schedule today. Unless there is a substantial increase in unemployment claims, DXY is probably going to stay in the small band of 107.50-108.00.
