Mid-Week FX Update: Pound Supported as Dollar Weakness Pauses

Sterling continues to trade with a constructive near-term bias against both the US dollar and the euro, supported by a more positive global market backdrop. Equity markets are advancing more broadly, rather than being driven by a narrow group of large US technology stocks, which is improving overall risk sentiment. In this environment, currencies such as the pound tend to benefit as confidence and capital rotation improve. 

The pound rose sharply against the US dollar in late January, reaching its highest levels in several years. That move was driven primarily by US dollar weakness rather than a material improvement in UK economic fundamentals. Since then, GBP/USD has pulled back modestly as the dollar has stabilised. 

This retracement appears to be a consolidation rather than a reversal. While the dollar has stopped weakening for now, it has not regained the broad support it previously enjoyed. Further direction in GBP/USD will depend largely on upcoming US data, particularly labour market releases, and how the Federal Reserve frames its policy outlook. 

Against the euro, sterling remains resilient but continues to struggle to extend meaningfully higher. GBP/EUR is trading close to recent highs but is encountering persistent resistance, indicating a lack of a clear catalyst to drive a decisive move in either direction. 

Both the Bank of England and the European Central Bank are expected to leave interest rates unchanged this week. With no significant policy divergence anticipated, GBP/EUR is more likely to remain range-bound than break out in the near term. 

The euro also rallied strongly against the dollar in January, reaching multi-year highs before easing back. As with sterling, this pullback reflects the dollar finding some short-term support rather than a deterioration in eurozone fundamentals. 

The broader outlook continues to point toward a softer dollar over time, but near-term price action is now more likely to be driven by economic data and central bank communication rather than headline momentum. 

Markets have shifted from a strong directional phase to a more balanced and selective environment. The US dollar no longer benefits from automatic support, but neither is it weakening in a straight line. Sterling and the euro remain supported, although further gains now require confirmation from data and policy signals. 

For businesses with upcoming currency requirements, this is an environment where timing, structure and flexibility are likely to be more effective than attempting to predict a single directional move.