Weekly FX Outlook: Policy Divergence Reshapes GBP, EUR & USD at the Start of 2026

This week is less about a single headline event and more about confirmation. Markets are testing whether the narratives that built up into year-end still hold now that liquidity is returning and data flow is normalising. With holiday distortions fading, price action is beginning to matter again, not just positioning.
The dominant driver remains policy divergence, but the nature of that divergence has evolved. Interest rate differentials still matter, yet they are increasingly filtered through credibility, politics and relative growth momentum rather than headline inflation alone. Across the major currencies, this shift is reshaping how trends develop and how corrections behave. 

At the centre of this adjustment sit the pound, the euro and the dollar. 
 

Sterling enters the week in a familiar position. Global conditions are broadly supportive, but domestic fundamentals remain fragile. 

UK equities have started the year strongly, with the FTSE 100 pushing to record highs. Historically, that backdrop tends to benefit the pound, particularly against the euro and the dollar, reflecting sterling’s high sensitivity to global risk appetite. That relationship has held. Where equity momentum has remained intact, the pound has stabilised. 

The problem for sterling is that this support is external rather than earned. Beneath the surface, UK growth remains soft, consumer demand subdued and labour market indicators continue to point towards rising slack. Recent data has reinforced the sense that the post-budget slowdown was not merely temporary. 

The Bank of England’s latest rate cut did little to calm these concerns. The narrow vote split highlighted growing discomfort within the committee, but it also left the door open to further easing should conditions deteriorate. Markets have been quick to interpret this as confirmation that the policy path remains skewed toward lower rates. 

As a result, sterling remains reactive rather than resilient. It responds quickly when global sentiment improves, but it gives ground just as easily when domestic data disappoints or rate expectations shift. This asymmetry is central to how GBP is trading across pairs. 
 

That tension is most visible in GBP/EUR. 

Sterling has managed to push above an important medium-term technical threshold, moving through its 100-day moving average for the first time since autumn. This level had capped rallies repeatedly into year-end, and the break is constructive from a short-term perspective. 

However, context matters. The move occurred during thin conditions and alongside stalling equity momentum. When stock markets pause, GBP/EUR typically loses lift. Without a renewed pulse of risk appetite, progress tends to slow and gains consolidate rather than extend. 

Fundamentally, the balance remains tilted against sterling over the medium term. UK data continues to soften, and markets remain alert to the risk that the Bank of England ultimately cuts more aggressively than its peers in 2026. The European Central Bank, by contrast, has deliberately avoided pre-committing to easing. By emphasising data dependence and patience, the ECB has quietly reinforced the euro’s rate floor. 

This combination means GBP/EUR rallies are currently tolerated rather than trusted. Unless UK growth and labour data begin to surprise consistently to the upside, sterling strength against the euro still looks more like a relief rally than a genuine regime shift. 
 

Against the dollar, sterling has behaved more constructively. 

The broader softening trend in the US currency continues to underpin GBP/USD, even as short-term pullbacks develop. Recent weakness has been orderly and technical in nature, consistent with a reset rather than a reversal. Crucially, the broader structure remains intact, suggesting that dollar dynamics continue to dominate the pair. 

The US backdrop explains why. The Federal Reserve has shifted decisively toward neutrality, and markets are increasingly focused on what comes next. Political uncertainty surrounding future Fed leadership has begun to weigh on institutional credibility, compressing the dollar’s risk premium. 

This is no longer just a data story. It is a confidence story. Markets are not pricing personalities, but they are pricing uncertainty. As long as expectations for further US rate cuts remain embedded, and as long as political noise clouds the outlook for Fed independence, dollar rallies are likely to be tactical rather than structural. 

That environment continues to support GBP/USD, even though sterling itself lacks strong domestic momentum. 
 

EUR/USD remains the clearest expression of this broader macro transition. 

The pair is consolidating just below a major resistance zone that has defined its upper boundary since late summer. This is not random congestion. It reflects the convergence of multiple high-timeframe technical references and the upper channel of the 2025 advance. 

What matters is how price is behaving. EUR/USD is holding below resistance rather than being rejected from it. Markets that fail to break higher but also fail to sell off are not distributing. They are absorbing. 

The ECB’s December messaging was pivotal. By removing near-term easing expectations without adopting a hawkish tone, policymakers stabilised the euro’s yield profile. Pullbacks have been shallow and well defended as a result. 

On the US side, dollar weakness remains driven as much by politics as policy. As expectations build for a more accommodative Fed leadership path, the dollar’s relative dominance continues to erode. This has allowed EUR/USD to trade increasingly as a rate-differential normalisation story rather than a cyclical risk trade. 

Short-term volatility around US data remains likely, particularly around labour and sentiment releases. However, unless those moves damage the broader structure, they are more likely to represent corrective resets than trend failure. 
 

USD/CAD continues to grind lower, though without urgency. 

The dollar’s softness is evident, but the Canadian dollar has not delivered decisive follow-through. Oil prices remain stable rather than supportive, and domestic Canadian data has been steady rather than strong. The result is a controlled drift rather than a directional break. 

Policy divergence remains a modest headwind for the pair. The Bank of Canada has resisted the urge to guide aggressively toward cuts, while the Federal Reserve remains on a clearer easing path. That differential favours gradual downside pressure, but positioning remains cautious. 

Geopolitical developments have introduced episodic support for the dollar through safe-haven demand, particularly following recent US actions abroad. These impulses have faded quickly, reinforcing the idea that underlying dollar weakness remains the dominant force. 

For now, USD/CAD reflects a market waiting for confirmation rather than conviction. 
 

Across sterling, the euro, the dollar and the Canadian dollar, the same pattern is emerging. Volatility has compressed, technical structures are being respected, and markets are positioning ahead of the next meaningful policy and data impulse. 

Sterling remains highly sensitive to sentiment, but vulnerable to domestic deterioration. The euro is benefiting from policy stability and improved credibility. The dollar is losing dominance not because of collapse, but because its advantage is narrowing. And the Canadian dollar continues to trade as a relative value currency rather than a directional leader. 

This is not a market in panic, nor one in euphoria. It is a market storing energy rather than exhausting it. 

For clients with currency exposure in the months ahead, execution matters more than prediction. In environments like this, structured approaches, phased execution and disciplined risk management tend to outperform reactive decision-making. 

We are watching the same data, the same policy signals and the same technical levels as the market. The difference lies in how they are used.