The US dollar is on investors’ radar this week. Investors will be paying close attention to key data releases— and US inflation data—which were supposed to be released last week but were suspended due to a delayed government spending bill. Recent indicators are pointing to a slowing labor market ( report released on February 4th). Investors’ focus will also shift to the inflation reports due on Friday. At the moment, high-frequency and analytical indicators suggest that inflation is no longer accelerating and is slowly easing; however, it remains sticky, especially in services, keeping core inflation above the Fed’s 2% target.
According to the latest CME FedWatch probabilities, markets continue to price in a measured easing path. Probabilities show low conviction around an imminent March rate cut, roughly 20-23%, with investors seeing potential cuts coming in the middle of the year once inflation and labor market trends become clearer. Future pricing implies a base case for 2026 of 50-75 basis points of cumulative cuts. These rate expectations seem to contribute to a cap on any upside for the dollar. 
Meanwhile, in the Euro Area, inflation is below target. President Lagarde last week stated that inflation in the Euro Area is at a good place despite the possibility of inflation figures moving unevenly in the month ahead due to unforeseeable geopolitical risks. However, policy decisions will not be driven by every single data release. Euro area money markets are pricing a much firmer rate hold. Market pricing implies around a 90% probability of no change at the March 2026 governing council meeting, with minimal easing priced over the full year—on the order of 0-10 basis points and, in some scenarios, no cuts at all. Inflation is already at or below target, and a stronger euro is exerting disinflationary pressure. US front-end rates are expected to fall faster (50-75 basis points) compared to Euro-area rates. The expected short rate differential narrows in favor of the EUR, mechanically supporting upside. 
Last week, the held rates steady at 3.75%, but in a narrow 5-4 vote, with surprisingly four members opting for an immediate 25 basis point cut. Guidance states that rates are “likely to be reduced further.” The BoE expects inflation to drop toward 2% from April, and markets and economists are biased toward a spring cut (April-March). The ECB is steadier than the BoE. The BoE’s message on cuts likely to come later does not support a continued downside in unless the ECB turns unexpectedly dovish from hold. Soft UK data into March/April—wages, services CPI, and the April CPI print—will be key indicators as to whether the odds of an April cut increase, which could pressure the GBP. 
To conclude, rate differentials are compressing, but not uniformly. The Fed’s eventual easing bias limits sustained USD strength, the ECB’s stability underpins the euro, and the BoE’s proximity to further cuts introduces downside risk for sterling on a relative basis.
