February monthly market update - Reflections on January 2026

A weaker US dollar is reflecting deeper political and economic tensions, with important implications for global trade, inflation and financial markets.

Why has the dollar weakened?

The dollar fell to its weakest level in four years against a basket of foreign currencies at the end of January, hitting multi-year lows against the pound and the euro. Much of this weakness has been driven by concerns over President Donald Trump’s unpredictable economic policies, which have added to uncertainty around the direction of US trade policy.

Last year, the dollar dropped almost 10% against a basket of major currencies, its worst performance since 2017, largely driven by Trump’s Liberation Day tariffs. In recent weeks, the dollar has fallen further as tensions grew between the US and Europe over Greenland. There were also losses amid speculation that the US could sell dollars alongside Japan to help boost the yen.

A weaker US currency makes exports more competitive, as American goods become cheaper for foreign buyers. On the other hand, it also makes imports more expensive for US consumers. The dollar’s decline may signal a loss of its safe-haven appeal, helping to fuel a surge in gold prices as investors seek lower-risk assets.

A stronger euro could pose problems for European countries. The European economy recorded modest growth at the end of last year despite higher US tariffs. However, a stronger euro against the dollar could now weigh on exports by making them more expensive, posing a particular challenge for Germany, the eurozone’s largest economy and a major exporter

Is China preparing for slower economic growth in 2026?

Evidence suggests China’s economy is slowing ahead of 2026 amid persistent economic headwinds. The South China Morning Post has reported that China will set a lower economic growth target this year, in the range of 4.5% to 5%, down from 5% last year. Local provinces have already lowered their growth targets, fuelling speculation that Beijing will follow suit, according to the Wall Street Journal.

China met its official growth target of 5% last year, matching growth in 2024, despite slowing to 4.5% in the final three months. Exports accounted for a third of economic growth in 2025, the highest share since 1997, as weaker trade with the US was offset by stronger trade with other countries.

Momentum weakened further last quarter, with consumer spending and business investment remaining sluggish. Despite record exports, the world’s second-largest economy faces mounting pressure from weak domestic demand. Factory activity unexpectedly deteriorated in January after ending a record run of contraction in December.

A slowing labour market, weak wage growth and falling house prices have weighed on consumption, while the prolonged property crisis has eroded household wealth and confidence. As a result, deflationary pressures persist, with consumers remaining reluctant to spend.

Could trump’s attacks on the fed fuel inflation?

Economists have warned that President Donald Trump’s attacks on the US Federal Reserve (Fed) could make it harder to control inflation. Since his re-election, Trump has publicly criticised Fed Chair Jerome Powell for not cutting interest rates quickly enough, repeatedly calling him "stupid".

Tensions escalated in January when federal prosecutors opened a criminal investigation into Powell over testimony he gave regarding renovation costs at the Fed’s Washington DC headquarters in June.

Economists argue that political pressure can push interest rates below levels needed to contain inflation, increasing the risk of rising price pressures. Trump’s efforts to undermine the Fed have contributed to higher gold prices and a weaker dollar over the past year. Market expectations for long-term inflation also rose in January following his comments.

Investors view central bank independence as critical to controlling inflation, as it allows policymakers to focus on underlying economic pressures. The Fed resisted pressure from the White House at its January meeting, pausing its series of interest rate cuts.

Trump has nominated Kevin Warsh, a former central bank governor, as the Fed’s next chair. Jerome Powell’s term ends in May. While inflation has fallen sharply from its 2022 peak of more than 9%, it has picked up in recent months, standing at 2.7% in December.

Looking ahead

The Fed held rates in a range of 3.50% to 3.75% at its January meeting following a series of interest rate cuts. Markets expect the central bank to wait until at least June before easing policy further.

The Bank of England also held rates at 3.75%, but signalled that a future cut is likely if inflation continues to fall back towards 2%. While inflation has proved stickier than expected, analysts now anticipate the next rate cut in the spring.

The FTSE 100 climbed further at the start of February, coming close to the 10,500 mark. Upcoming UK earnings reports may provide insight into whether higher interest rates and weak domestic demand are feeding through to profits, particularly among consumer-facing companies.

Earnings season has begun strongly, with the S&P 500 beating expectations. Although concerns remain over the Fed’s independence, markets generally welcomed Trump’s nomination of Warsh as the next Fed chair.