High beta G10 FX strengthen including GBP at start of 2026

USD: Building optimism over global growth ahead of release of NFP report

The high beta commodity-related G10 currencies of the Australian and New Zealand dollars have outperformed overnight supported by the ongoing improvement in global investor risk sentiment. MSCI’s ACWI global equity index has risen to fresh record highs at the start of the new calendar after a period of consolidation since the autumn. Similarly, the price of copper which is normally viewed as an important barometer of global growth has hit a fresh record high as well rising above USD13,000/tonne for the first time. It comes at a time when global economic data surprises have been running at their most positive levels since the first half of 2024. Evidence of strengthening global growth momentum is a supportive factor for our forecast for the US dollar to weaken further in 2026 even as US economic growth is expected to pick-up as well during the first half of this year driven by stimulus from President Trump’s One Big Beautiful Bill.  The release yesterday of the ISM manufacturing for December did signal though that business confidence in the manufacturing sector was softer than expected at the end of last year. The softer reading contributed to a weaker US dollar yesterday but is unlikely to materially alter expectations for stronger US growth.

Market participants will be watching more closely the release of the December nonfarm payrolls report on Friday to assess whether the US labour market remains weak, leaving the door open for further Fed rate cuts this year. Private employment growth has shown some tentative improvement in recent months. The three month average for private employment growth increased to 75k in November up from a low of 13k in August. The Fed still views the data as consistent with close to flat employment growth. Fed Chair Powell noted toward the end of last year that the nonfarm payrolls figures likely overstate job creation by approximately 60k jobs per month. Ahead of the release of the nonfarm payrolls report, the US rate market is pricing in only around 4bps of cuts for the next FOMC in January and around 14bps of cuts by the following meeting in March. Private employment growth would likely have to increase back above 100k/month to prompt US rate market participants to push back the timing of further Fed rate cuts, and provide more support for the US dollar at the start of this year.  

EUR/GBP DIVERGING FROM YIELD SPREAD AT START OF 2026

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Optimism over closer trading relationship with EU providing support?

The pound has outperformed alongside other high beta G10 currencies at the start of this year. Upward momentum for the pound was reinforced yesterday after EUR/GBP broke back below the 0.8700 level, and fell closer to support from the 200-day moving average at 0.8635 for the first time since May. In the process the pound has now reversed all of the losses sustained in the autumn in the run up to the UK government’s budget announced in late November. The price action highlights that the pound is continuing to benefit from the reduction in UK fiscal and political risks in the near-term, alongside current favourable conditions for carry trades. The pound still one of the highest yielding G10 currencies despite the BoE’s decision to lower rates by a further 25bps to 3.75% at the end of last year.          

At the same time, the stronger pound could have been encouraged by recent comments from government officials indicating a desire to return to a closer trading relationship with the EU. The most high profile comments were made over the weekend by Prime Minister Keir Starmer who stated “I think we should get closer, and if it’s in our national interest to have even closer alignment with the single market, then we should consider that, we should go that far. I think it’s in our national interest to go further”. He believes “ we are better looking to the single market rather than the customs union for our further alignment”. The comments are the clearest indication yet that the prime minister wants to pursue a closer relationship with Europe in a broader number of areas. The UK is already  more closely aligned on food and agriculture, and he would consider aligning more closely for other sectors if in the national interest. A shift back to a closer trading relationship with the EU would be welcomed by financial market participants and encourage a stronger pound. However, the scope for a closer trading relationship in the current parliament are likely to be limited by Labour’s election manifesto pledge that “there will be no return to the single market, the customs union, or freedom of movement”. It should curtail pound upside in the near-term on back of optimism over the potential for an improvement in trading relations with the EU.   

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com