Sterling Stalls Below 1.35 as Geopolitical Risks Anchor the Greenback

GBP: Sterling stalls as focus shifts to external risks

Sterling traded with a heavy tone this morning, struggling to regain the 1.3500 handle against the US Dollar as domestic fundamentals took a back seat to global geopolitical tensions. While recent hiring activity at the end of 2025 showed a decline in permanent placements—the sharpest fall since August—the market is increasingly looking past UK data towards broader risks. The British pound is currently finding itself range-bound between 1.3390 and 1.3520 as traders weigh weak internal growth against the distraction of international events.

The UK labour market continues to signal softening, with candidate availability rising due to a recent uptick in redundancies. Despite this, starting salary inflation hit a seven-month high in December, providing a complex backdrop for the Bank of England. Analysts suggest that unless tomorrow's GDP data provides a significant upside surprise, the pound may remain vulnerable to a "defensive" market stance, particularly as energy price volatility remains a persistent concern for the UK’s trade balance.

EUR: Euro trapped in downtrend amid trade uncertainty

The Euro remains largely stable but fragile ahead of the New York open, as the currency pair finds itself trapped in a persistent downtrend. Sentiment in the Eurozone is being heavily influenced by fresh geopolitical developments, most notably President Trump's recent threats to impose 25% tariffs on countries trading with Iran. Such measures are stoking fears of a renewed global trade war, which historically weighs more heavily on the export-sensitive Euro than its peers.

While the German ZEW Economic Sentiment index showed a surprising rise to 45.8 in late December, the "current conditions" index remains deeply negative at -81.0, highlighting the disconnect between future hopes and current economic reality. With the European Central Bank (ECB) closely monitoring these survey results, any further deterioration in risk appetite—evidenced by the recent retreat in the DAX from record highs—could see the EUR/USD pair test support levels near $1.0800 if geopolitical rhetoric escalates further this week.

USD: Dollar holds firm as markets digest inflation mix

The US Dollar is maintaining its strong position this morning, supported by a "middle-of-the-road" inflation profile and safe-haven demand. Yesterday’s CPI announcement showed headline inflation holding steady at 2.7% year-on-year, exactly in line with consensus. While the data didn't provide a "hawkish" shock, it effectively lowered the market's expectation for an aggressive series of rate cuts in the first half of 2026, keeping Treasury yields buoyed.

Additional USD strength is being fuelled by "Trump-risk" positioning, as markets react to the administration's stance on Iran and a potential probe into the independence of the Federal Reserve. Although Republican lawmakers have attempted to ease concerns regarding Jerome Powell's position, the dollar remains the primary beneficiary of global uncertainty. All eyes now turn to today's Producer Price Index (PPI) and Retail Sales data, which are expected to provide the final piece of the puzzle for the Fed's near-term policy path.

Today's Highlights

• GBP: No Major Data (Focus on tomorrow's GDP)

• EUR: No Major Data

• USD: 13:30 Producer Price Index (PPI) m/m & Retail Sales m/m