Weekly FX Outlook: Political Risk, Policy Credibility and the Key Tests Ahead for GBP, USD and EUR

Foreign exchange markets enter the new week with a clear theme emerging: this is not about a single data release or policy meeting, but about credibility, confirmation and follow-through. 

Liquidity has returned after the holiday period, volatility is beginning to normalise, and markets are now testing whether the narratives built into year-end pricing still hold. The dominant force remains policy divergence, but political risk has re-entered the equation in a way that could meaningfully shape price action this week. 

The US dollar sits at the centre of that reassessment, while sterling continues to hold its ground rather than extend aggressively, and the euro remains supported by relative stability. 
 

The US dollar starts the week on the defensive after renewed political pressure on the Federal Reserve raised fresh questions around institutional independence. 

Legal action initiated by the US administration against the central bank, and the personal targeting of Chair Jerome Powell, has unsettled markets not because of immediate policy implications, but because of what it represents longer term. FX markets are forward-looking, and credibility matters. When investors begin to price even a small risk that monetary policy decisions could be influenced by political agendas, the result is a higher risk premium on the currency. 

That is already visible in price action. The dollar sold off across the board as the news broke, lifting both EUR/USD and GBP/USD, while US equity and Treasury futures softened. While near-term Federal Reserve policy is unlikely to change as a result of this episode, the damage to confidence is harder to reverse. 

This week, US inflation data and labour market indicators will be crucial. A firm upside surprise could stabilise the dollar temporarily by reinforcing the idea that the Fed cannot rush into further cuts. However, unless data materially challenges the broader easing narrative, dollar rallies are likely to be tactical rather than structural.
 

The euro continues to benefit from being the most stable currency in an unstable landscape. The European Central Bank has made a point of removing near-term easing expectations without committing to a hawkish path, reinforcing a sense of policy patience. 

That stance matters this week as Eurozone inflation data and sentiment indicators are released. Unless these prints undershoot materially, the euro should remain supported on dips, particularly against sterling. This relative steadiness keeps pressure on GBP/EUR whenever UK data disappoints, even if the broader trend remains range-bound. 

EUR/USD is also sensitive to the dollar story. With the greenback losing some of its institutional premium, the euro does not need strong domestic growth to perform. It simply needs the policy gap with the US to continue narrowing. 
 

In the commodity bloc, price action remains selective. The Canadian dollar has drawn modest support from resilient labour market data, but markets remain unconvinced that this materially alters the Bank of Canada’s policy path. USD/CAD continues to trade as a slow grind rather than a breakout, with direction this week likely dictated by US data rather than Canadian releases. 

The Australian and New Zealand dollars remain capped by expectations that their respective central banks could turn more hawkish later this year. That backdrop limits upside in GBP/AUD and GBP/NZD for now, but equally prevents sharp downside without a broader sterling sell-off or a clear shift in rate expectations. 
 

This is a week of confirmation, not transformation. 

Markets are asking whether early-year trends deserve to persist as liquidity normalises and data flow resumes. The dollar faces a credibility test that goes beyond economics. Sterling is holding fair, but remains highly sensitive to domestic evidence. The euro continues to benefit from relative calm. And commodity currencies are waiting for clearer policy signals. 

For those with currency exposure, this environment favours structure over impulse. Phased execution, disciplined hedging and opportunistic use of volatility remain more effective than chasing short-term moves. 

The narratives are in place. This week will begin to show which of them truly hold.