Weekly FX Roundup: Fundamentals Trump Headlines as the Dollar Loses Ground

It was a turbulent week in FX markets, shaped by political noise, geopolitical tension, and renewed concern around global debt dynamics. Yet by the close, currencies told a more familiar story. Once the dust settled, markets reverted to fundamentals. 

The US dollar weakened, while sterling and the euro both finished the week stronger. Not because risks disappeared, but because relative growth momentum and interest rate expectations ultimately mattered more than headlines. 

At the start of the week, the backdrop appeared dollar-supportive. Trade tensions resurfaced as Washington escalated rhetoric toward Europe over Greenland. Global bond markets showed signs of strain, particularly in Japan, where weak demand at long-dated auctions revived concerns around debt sustainability. In another environment, these developments might have triggered a broad flight to USD. 

That did not happen. 

As the week progressed, it became clear that US data, while still firm, offered no fresh upside surprise. Labour market indicators remain consistent with a cooling, not collapsing, economy. Inflation continues to ease gradually. This leaves the Federal Reserve comfortably on hold, but it also means the yield advantage that previously underpinned the dollar is no longer widening. 

With no clear catalyst for renewed USD strength, the currency drifted lower into the end of the week. This was not a loss of confidence in the US, but a recalibration of relative momentum across G10. 

Sterling’s performance was a defining feature of the week. 

UK data surprised positively across several fronts. Retail sales beat expectations, signalling resilience in consumer demand. PMI surveys rebounded decisively, with manufacturing, services, and the composite index all moving back into expansion territory. Private sector growth reached its strongest pace in nearly two years. 

Inflation data added nuance rather than alarm. Headline CPI ticked higher, services inflation remained elevated, and core measures were stable. The message for markets was clear. Inflation is easing, but not fast enough to justify urgency from the Bank of England. 

Together, these releases forced markets to push back expectations for near-term rate cuts. UK yields stabilised at higher levels, offering sterling support, particularly against the euro. 

Political headlines briefly unsettled the pound midweek, as speculation around Labour leadership dynamics triggered a short-lived sell-off in gilts and GBP. However, those moves faded quickly once it became clear that structural constraints remain in place and that domestic data had improved meaningfully. 

Sterling ended the week stronger, not because politics disappeared, but because economics reasserted control. 

Eurozone data painted a familiar picture. PMI surveys confirmed that the economy is still growing, but only just. Momentum is fading, services activity has cooled, employment has begun to contract, and export demand remains weak. France slipped back into contraction, while Germany showed tentative improvement without a decisive rebound. 

On its own, this is not a compelling growth story. However, two factors supported the euro. 

First, inflation pressures, particularly in services, re-accelerated. This limits the scope for near-term easing from the European Central Bank. Second, the broader softening in the US dollar reduced relative pressure on the single currency. 

The euro strengthened by default rather than conviction. It benefited from the absence of deterioration, rather than evidence of acceleration. 

Elsewhere in G10, the absence of a broad risk-off move was telling. 

Commodity-linked currencies held up well. The Australian and New Zealand dollars remained supported by improving domestic data, resilient business sentiment, and confidence in their central banks. The Canadian dollar benefited from higher oil prices, even as geopolitical risk premiums fluctuated. 

Traditional safe havens such as the Swiss franc and Japanese yen saw only episodic demand. There was no sustained flight to safety, reinforcing the view that markets are uneasy, but not alarmed. 

This is not an environment defined by panic. It is one defined by discrimination. 

Looking back, this was a week of relative adjustment rather than regime change. 

The dollar weakened as its yield advantage stopped widening. Sterling strengthened as UK data pushed back rate cuts. The euro held firm as downside risks failed to worsen. Political noise moved markets intraday, but data determined where currencies settled. 

G10 FX remains a relative-value market, shaped by growth differentials, inflation persistence, and central bank credibility.  

Q: Should we be worried about FX markets right now?
A: No. Markets are unsettled, not unstable. Political headlines are creating short-term noise, but currencies are still being driven by relative growth and interest rate expectations. This is an environment for planning, not panic. 

Q: The US dollar weakened this week. Does that change how we should treat USD exposure?
A: Yes, at the margin. The dollar is no longer benefiting from a widening yield advantage. That does not mean sharp USD weakness, but it does mean passive dollar exposure offers less protection than it did previously. Large USD balances and unhedged USD payables deserve review. 

Q: Sterling and the euro both strengthened. Is this the start of a trend?
A: Not necessarily. Sterling benefited from better UK data pushing rate cuts further out. The euro strengthened mainly because downside risks did not worsen and the dollar softened. These were relative moves, not structural shifts. 

Q: What should we do if we have upcoming GBP or EUR payments?
A: This week has provided a window rather than a signal. Improved levels can be used to reduce risk on known exposures. Waiting for perfect rates risks missing the opportunity if sentiment turns again. 

Q: Are interest rates about to fall quickly?
A: No. Inflation is easing, but slowly. Central banks across G10 remain cautious. Rate cuts are coming, but not at a pace that removes the value of actively managing cash and FX exposure. 

Q: Should we be increasing hedging because of political risk?
A: Hedging should be targeted, not blanket. There is no evidence of systemic stress. Focus on timing, certainty, and known cash flows rather than broad defensive positions.  

This was a reminder week. 

FX markets are calm enough to act, noisy enough to punish complacency, and selective enough to reward preparation. 

The question is not where currencies go next.
It is whether your currency and cash positions are being managed with the same discipline as the rest of the balance sheet.