Political risk sets the tone

While never far from top of mind, the past week has seen political risk overshadow more typical FX catalysts, with central Bank decisions from the ECB and BoE left playing second fiddle. Granted, a brief US government shutdown early in the week also helped at the margin, delaying Friday’s payrolls report. Still, our view is that political dynamics in the UK and Japan would have been the key currency drivers in any case, alongside US-Iran negotiations and cross-asset spillovers. In the UK, emerging risks to Kier Starmer’s premiership, combined with a dovish BoE to see sterling slump. The yen continues to slide as well, with an election looming on Sunday. Meanwhile, volatility across precious metals and oil has helped spur FX price action more broadly, even as growing AI scepticism has seen equities struggling alongside wider market sentiment, to the benefit of the buck.

The coming week will see a continuation of these themes, likely eclipsing delayed US jobs data and January CPI readings. Monday should be dominated by the fallout from Japan’s weekend poll. The prospect of greater fiscal support could well send USDJPY back toward 160, threatening FX intervention. Similarly, the weekend news is only likely to add to political instability in the UK, leaving the backdrop skewed in favour of further sterling weakness. And all this occurs while a US military buildup in the Middle East is ongoing, and US-Iran negotiations show little sign of progress. Barring a surprise breakthrough in discussions, a turnaround for equities, or a data shock, the dollar is likely to remain a winner in the week coming up.

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Authors: 

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

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