Where are exchange rates as we hit late January? If you thought the start of 2026 was volatile, the third week of January has been a geopolitical rollercoaster. The “risk-on” rally that boosted the pound earlier in the month hit a wall this week, dominated by the escalation of the “Greenland Crisis” and threatened US trade tariffs.
However, as of Thursday 22 January, a fragile sense of calm has returned. Following President Trump’s speech at the World Economic Forum in Davos yesterday – where he ruled out the use of military force to acquire Greenland and paused the threatened 10% tariffs on European nations – markets are enjoying a relief rally.
Where are exchange rates going next? See what leading financial institutions predict in your free Quarterly Forecast.
The Big Picture: The “Davos Detente”
Until yesterday, the week was defined by fear. President Trump’s threat to impose a 10% tariff on eight European nations (including the UK and Denmark) if a deal for Greenland wasn’t reached had sent investors fleeing to the safety of the US dollar.
That changed on Wednesday. In his address at Davos, Trump announced a “framework for a future deal” regarding the Arctic territory and confirmed that military action is “not on the table.” While details remain scant, the immediate threat of a trade war has receded, allowing riskier currencies like the pound and euro to breathe a sigh of relief.
But what has happened since and where may exchange rates go as the month progresses?
GBP: Inflation ticks up, but tariff panic eases
Sterling has endured a mixed week, buffeted by trade threats and domestic data, though it has found some stability following the de-escalation in Davos. The primary economic driver was Wednesday’s CPI report, which showed UK inflation ticking up to 3.4% in December, driven largely by airfares and tobacco duties. While rising prices are rarely welcome news for households, the figure came in slightly below the Bank of England’s own forecast. This “sticky” inflation suggests the Bank will be forced to keep interest rates higher for longer to ensure price stability—a stance that typically supports the pound’s value against lower-yielding currencies.
However, the bigger relief for sterling was political rather than economic. As a service-based economy, the UK would have been disproportionately hit by the proposed 10% US tariff levy. The removal of this immediate threat has allowed GBP to steady against the Dollar, trading near $1.34, as the “risk premium” on UK assets fades slightly.
GBP/EUR past year
EUR: Rate cuts loom as inflation falls below target
The euro continues to look softer than its peers, weighed down by economic fundamentals that point squarely toward imminent rate cuts. In sharp contrast to the UK, confirmed data released on Monday showed eurozone inflation falling to 1.9% in December, officially dipping below the European Central Bank’s 2% target. With inflation apparently tamed, the pressure is now on the ECB to cut interest rates to stimulate the bloc’s flagging growth. Since lower interest rates generally lead to a weaker currency, the Euro has struggled to gain traction.
Furthermore, despite the pause in tariff threats, the single currency remains vulnerable. Europe sits in the direct crosshairs of US trade policy, and while the immediate danger has passed, the underlying tension is keeping a lid on any significant Euro recovery.
EUR/USD past year
USD: Political noise vs. Economic strength
The US dollar has been trading sideways, pulled in two directions by relentless political drama and undeniable economic strength. On the political front, the conflict between the White House and the Federal Reserve continues to rumble, with Fed Chair Jerome Powell’s attendance at a Supreme Court session regarding the firing of Fed officials highlighting the institutional tension.
Yet, despite this noise, the US economy remains a juggernaut. The Atlanta Fed’s “GDPNow” model is currently forecasting massive growth of 5.4% for the fourth quarter. This raw economic strength is keeping the Dollar attractive to investors, even as the “safe haven” demand—which peaked earlier in the week during the height of the Greenland standoff—begins to fade.
USD/GBP past year
What’s coming up: key events to watch
Looking ahead, several important economic events could influence exchange rates over the next couple of weeks:
- USA, Quarterly GDP (22 January)
- Global, Purchasing Managers Index (23 January)
- UK, Retail Sales (23 January)
- Global Purchasing Managers’ Indexes (PMIs) (23 January)
How to protect your own budget
Exchange rates can shift quickly – and when you’re moving large sums for a property purchase, that can mean thousands gained or lost. Speak to a currency specialist to discuss tools like forward contracts, which let you lock in an exchange rate for the future, shielding your budget from adverse movements.
