The US dollar has stabilised following January’s sharp repricing, but the move lacks broad structural follow-through. While GBP/USD has entered a corrective phase as sterling-specific pressures emerge, EUR/USD remains elevated. This divergence reinforces that recent USD support is tactical rather than systemic.

Across G10, FX markets are transitioning out of the one-directional USD sell-off that defined January and into a more volatile, policy-driven consolidation phase. Price action is becoming less trend-led and more reactive to political developments, central-bank signalling and positioning resets.

This shift marks a change in market character. Directional momentum has slowed, but volatility has increased.
 
USD - Stabilising, Not Recovering
January’s dollar decline was driven primarily by political risk premia, questions around Federal Reserve credibility and structural diversification away from USD exposure rather than a sudden deterioration in US economic fundamentals.

Recent support has emerged, but it is tactical in nature. Policy credibility stabilised following the nomination of Kevin Warsh as prospective Fed Chair. US officials also expressed discomfort with the pace of dollar weakness. At the same time, speculative short positioning became stretched and began to unwind, while a correction in precious metals and a modest risk-off tone in equities provided additional near-term support.
The result has been stabilisation, not recovery.

That distinction matters.

Dollar strength has been selective rather than broad-based. GBP/USD has corrected as sterling-specific risks have emerged, yet EUR/USD continues to hold elevated levels. Broader dollar index momentum remains fragile.
Until confidence in US policy direction, rate differentials and capital inflows is fully restored, USD upside is likely to remain corrective rather than trend-forming.

GBP - Supported Externally, Fragile Domestically
Sterling continues to hold up in global terms, but recent price action reinforces that its strength has been externally driven rather than domestically anchored.
Support has come primarily from dollar weakness, global equity inflows, improving risk appetite and relative yield positioning rather than UK macro outperformance.
Domestic cracks, however, are becoming more visible.

The Bank of England held interest rates at 3.75 percent in a narrow 5–4 vote split. Four Monetary Policy Committee members voted for an immediate rate cut, signalling a growing bias toward easing. Policymakers acknowledged that inflation persistence risks are diminishing while downside risks linked to weaker demand and a softening labour market are rising. Growth forecasts were also revised lower.

Markets are now pricing the beginning of the easing cycle as early as April.
This reinforces that sterling strength is not policy-led.
At the same time, political risk has re-emerged as a live FX driver. Leadership pressure surrounding Prime Minister Keir Starmer, cabinet instability and fiscal policy uncertainty have injected a domestic risk premium into sterling.
This dynamic has been most visible in GBP/EUR, widely viewed as the cleanest expression of UK-specific risk within G10 FX.
Sterling remains globally supported, but domestically sensitive.
 
GBP/USD - Uptrend Paused, Correction Active
GBP/USD’s rally toward the 1.38 region in late January was driven primarily by dollar weakness rather than a material improvement in UK fundamentals.
The subsequent pullback reflects a convergence of factors. Dollar stabilisation, dovish Bank of England repricing, rising UK political risk and an unwind of overbought positioning have all contributed to the corrective phase now unfolding.
This price action should be viewed as consolidation rather than reversal.
Direction from here remains dollar-led, with US payrolls data, inflation releases and Federal Reserve signalling likely to dictate near-term momentum.

GBP/EUR - Capped and Politically Exposed
GBP/EUR remains technically capped near long-standing resistance in the 1.16 region. Repeated failures to sustain gains above this level confirm heavy selling interest and a lack of structural upside momentum.
Political developments have reinforced downside sensitivity. UK fiscal credibility concerns and leadership uncertainty are feeding directly into pricing, weighing on sterling relative to the euro.
With limited policy divergence between the Bank of England and the European Central Bank, the cross remains range-bound.
This is a tactical execution market rather than a directional trend environment.

EUR/USD - Elevated, Resilient, USD-Driven
EUR/USD continues to trade at elevated levels despite recent dollar stabilisation, reinforcing the selective nature of USD support.
Euro strength reflects policy predictability from the ECB, narrowing Fed rate differentials and ongoing structural capital flows away from the dollar. Reduced safe-haven demand for USD has also supported the pair.
Near-term risks remain heavily data-dependent. US payrolls, inflation surprises and shifts in Fed rate expectations will dictate short-term direction.

Seasonality adds caution. February has historically been a firmer month for the dollar, suggesting consolidation risk rather than immediate upside extension.
Even so, the medium-term bias still favours gradual USD depreciation rather than sustained recovery.

Investment Bank Overlay
Institutional forecasts reinforce the consolidation narrative currently unfolding in spot markets.
Research from J.P. Morgan projects GBP/USD volatility rather than sustained trend continuation. Their base case sees the pair stabilising around the mid-1.30s longer term, with intermittent recoveries toward the high-1.30s through 2026 rather than a structural move higher.
This outlook reflects structural pressures on sterling, including productivity constraints, labour supply challenges, trade policy risk and persistent balance deficits.
At the same time, periods of dollar weakness are still expected to generate tactical GBP/USD upside.
This aligns closely with current market structure. Range, not trend.

Lamera View
Markets have moved decisively from repricing to confirmation.
January delivered the directional dollar move. February is testing whether that repricing holds.
Selective USD stabilisation, rising GBP political risk and passive euro strength are combining to produce one of the most reactive FX environments seen in several years.
Narratives are shifting quickly. Moves are faster. Timing risk has increased materially.
This is no longer a momentum market. It is a catalyst market.

Bottom Line
The core calls remain intact.
USD weakness has paused, not reversed. GBP/USD has entered a corrective phase. GBP/EUR remains capped and range-bound.
What has changed is depth rather than direction.
Sterling is now trading with an added political risk premium, increasing volatility across GBP crosses.
For businesses and investors alike, this is no longer a market to approach passively. Structure, flexibility and active risk management matter more now than directional conviction.
 

 
Has the US dollar bottomed?
Not structurally. The dollar has stabilised following January’s sell-off, but support is tactical. Broader confidence, rate differentials and capital-flow dynamics do not yet support a sustained recovery.

Why is EUR/USD holding up better than GBP/USD?
Because euro strength is policy-stable while sterling is politically sensitive. EUR/USD is benefiting from USD softness alone, whereas GBP/USD must also absorb domestic UK risks.

Is sterling still strong overall?
Externally, yes. Domestically, less so. Sterling strength has been driven by global conditions rather than UK outperformance, leaving it exposed to political and policy shocks.

What matters most for FX direction now?
US data, central-bank signalling and political risk premia. Markets are reacting to catalysts rather than trading sustained trends.

Is this level of volatility unusual?
Yes. We are operating in one of the most policy-reactive and politically sensitive FX environments of recent years, where narratives shift quickly and execution timing carries greater importance.