Weekly FX Roundup: Sterling Tests Conviction as Data Replaces Relief

Foreign exchange markets spent the past week shifting from narrative to validation. With year-end liquidity distortions fading, currencies are now responding less to positioning and more to confirmation, particularly in the form of labour market data, growth indicators and evolving policy expectations. 

What stood out this week was not a single dominant catalyst, but a clear change in tone. Sterling continued to outperform, the US dollar showed signs of stabilisation after a soft run, and commodity currencies delivered mixed signals as investors reassessed the pace of global easing. 

The pound extended its early-year advance, moving toward a fourth consecutive weekly gain against the euro and remaining well supported against the dollar. The rally has been underpinned by continued unwinding of pre-Budget short positions and a broadly constructive global risk backdrop. 

That said, the pace of gains slowed as the week progressed. Sterling’s advance pushed into technically stretched territory, prompting some profit-taking near longer-term resistance levels. Importantly, the pullback has been shallow, suggesting that demand has not disappeared, but the market is becoming more selective. 

Fundamentally, the story remains unchanged. Sterling is being tolerated rather than re-rated. The rally reflects relief and positioning rather than a decisive improvement in the UK’s growth outlook. With UK GDP data due next week, markets are increasingly focused on whether the domestic economy can justify the currency’s recent resilience. Without confirmation, sterling strength risks becoming fragile rather than sustainable. 

Against the euro, sterling’s outperformance has been notable, with the pair recording one of its strongest weekly moves in months. The move has been supported by short-term momentum and stable equity markets, both of which typically benefit the pound. 

However, the euro continues to benefit from policy stability. The European Central Bank’s reluctance to pre-commit to easing has reinforced a floor under the single currency, particularly relative to sterling. As a result, GBP/EUR remains highly sensitive to UK-specific data, with rallies likely to persist only if economic releases show tangible improvement. 

The dollar’s downtrend lost some momentum this week following an ambiguous US jobs report. While headline employment growth undershot expectations, the unemployment rate edged lower and wage growth surprised to the upside. This combination eased fears of a sharp labour market deterioration and prompted markets to push expectations for further Federal Reserve rate cuts further into 2026. 

The result was a brief stabilisation in the dollar, with Treasury yields edging higher and USD selling pressure moderating. Structurally, the dollar remains under pressure from narrowing rate differentials and institutional uncertainty, but this week’s data highlighted that the path lower is unlikely to be linear. 

In North America, the Canadian dollar found support from another upside surprise in employment data. While the headline job gains were modest, the continued run of positive surprises helped stabilise CAD crosses. However, markets remain unconvinced that the data is strong enough to force a meaningful rethink at the Bank of Canada, limiting follow-through. 

Elsewhere, the Australian dollar stood out as a relative outperformer, supported by firm labour market conditions, resilient growth and rising expectations that the Reserve Bank of Australia may eventually need to lean more hawkish. This contrast has reinforced AUD’s position as one of the clearer policy divergence beneficiaries within G10. 

This week marked a transition from relief to reassessment. Sterling continues to perform, but now faces a higher bar for further gains. The dollar remains structurally pressured, but data is beginning to slow the pace of depreciation. Meanwhile, policy credibility and relative growth momentum are once again becoming decisive. 

As January progresses, markets are becoming less forgiving. Positioning has adjusted, narratives are being tested, and currencies are starting to reflect not what investors hope will happen, but what the data is actually confirming. 

That shift is likely to define the weeks ahead.