Sterling is extending its advance against the greenback in early 2026 trading as hawkish rhetoric from Bank of England policymakers forces markets to pare aggressive easing bets. The pound's momentum reflects growing conviction that UK inflation remains too sticky for comfort, even as growth concerns linger. Meanwhile, the Australian and Canadian dollars are rallying alongside crude oil and industrial metals, buoyed by fresh evidence that Chinese authorities are stepping up stimulus measures to shore up the world's second-largest economy.
Market participants say the BOE's messaging shift became evident after December's inflation data surprised to the upside, with core metrics holding well above the central bank's target. "The market had priced in nearly six rate cuts for 2026, but that looks increasingly untenable," notes a London-based currency strategist. Overnight index swaps now reflect roughly four quarter-point reductions, repricing that has provided sustained lift to sterling across major crosses. Traders are watching for Thursday's speech by BOE Chief Economist Huw Pill, who is expected to reinforce the cautious approach.
The commodity currency bloc is drawing support from Beijing's latest policy signals. China's State Council announced expanded fiscal support for infrastructure spending over the weekend, while the People's Bank of China injected substantial liquidity through medium-term lending facilities. These moves are resonating in FX markets, where the Australian dollar is gaining ground and the Canadian dollar is firming alongside West Texas Intermediate crude's upward trajectory. "China's pivot toward more aggressive stimulus is exactly what commodity currencies needed," says a senior trader at a major Canadian bank. "We're seeing real money accounts rebuild long positions in AUD and CAD after sitting on the sidelines in Q4."
Beyond the currency space, the risk-on tilt is pressuring the dollar broadly while providing modest support to gold as a diversification play. Bitcoin is also attracting institutional flows, with analysts noting increased participation from traditional asset managers seeking exposure to digital assets in the new year. The Federal Reserve's policy path remains a key wildcard; while markets expect the Fed to begin cutting rates by mid-2026, the timing and pace remain data-dependent. Technical analysts point to key resistance zones ahead for cable, with momentum indicators showing bullish divergence on daily charts. For the commodity bloc, eyes are fixed on Friday's Chinese trade balance data, which could validate or derail the current optimism.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.