Economic Update

09 February 2026

Japan election strengthens PM’s mandate as markets adjust

Japan’s general election delivered a decisive result, with Prime Minister Takaichi securing 316 of 465 Lower House seats. This marks the largest parliamentary majority since the Second World War and gives the government a clear route to advance its policy agenda, which includes tax cuts and increased public spending. Those measures may eventually raise questions in the financial markets, although that concern remains a future risk rather than an immediate one.

For now, the yen and equity markets both rallied following the result. Yields moved sharply higher, reflecting expectations that stronger fiscal support could lift growth and inflation prospects. As other major economies have already lowered borrowing costs or are in the process of doing so, narrowing interest rate differentials create a more challenging backdrop for sustained yen weakness in the near term. I expect that theme to persist over the coming weeks and months.

UK political pressure builds as attention turns to Q4 GDP

Political developments offered little relief to the UK government. Prime Minister Keir Starmer now faces the departure of Chief of Staff Morgan McSweeney, who resigned following the decision to appoint Lord Mandelson as UK Ambassador to the US. The change may aim to calm tensions within the Labour Party, although early media reactions suggest no such improvement so far.

Sterling continued to underperform against the dollar and euro this morning. Markets' attention remains  split between political and economic considerations:

• Political outlook: The Manchester by‑election. Weekend reports indicate that bookmakers see the Greens as favourites, with Labour potentially placing third behind Reform.
• Economic outlook: Markets will assess whether inflation continues to decline and whether activity softens further. Q4 and December activity data due this week could confirm steady but modest growth. That scenario provides little support for the pound, particularly as last week’s Bank of England vote indicated waning influence from the Committee’s more hawkish members.

If that trend continues, markets may need to reconsider the scale of interest rate cuts priced for the remainder of 2026, which creates downside risks for the pound.

ECB speakers expected to reinforce policy stance

President Lagarde, Chief Economist Lane and Bundesbank President Nagel are due to speak today. I do not expect major deviations from recent messaging that current monetary policy remains appropriate. However, the recent drop in both headline and core inflation complicates the ECB’s narrative that inflation will remain close to target.

Underlying fundamentals tell a softer story, with sluggish growth and subdued private investment. Meanwhile, the euro’s strength—up around 12 percent against the dollar, 12.5 percent against the yen and roughly 5 percent against the pound—continues to limit imported inflation pressures. While domestic forces still dominate price dynamics, currency appreciation adds to the downward drift in inflation, in my view.

US data could clarify Fed direction as markets watch CPI

Recent secondary labour market indicators pointed to softening conditions: employment growth slowed, job openings fell to a five‑year low and ISM employment components weakened. These signals suggest easing price pressures, yet inflation has struggled to return to target and pockets of economic resilience persist.

This week’s January data releases therefore carry particular weight. Tuesday’s retail sales figures, Wednesday’s delayed non‑farm payrolls report and Friday’s CPI release will shape expectations for the next Federal Reserve meeting. While labour market data will attract significant attention, CPI inflation remains the more influential indicator for policy decisions, in my view.

The dollar index continues to hold near a key support level around 97.5 but looks vulnerable. Any sustained dollar weakness—or renewed tariff concerns—could delay further Fed rate cuts, irrespective of whether Kevin Warsh is confirmed as the next Fed Chair. Given the economy’s recent resilience, I see risks tilted towards renewed dollar strength on the retail sales figures.

Mexico data expected to reinforce MXN resilience

Banxico’s decision last week to pause its rate‑cutting cycle came as no surprise after reducing the overnight rate from 11.25 percent to 7 percent over two years. This week’s CPI release and industrial production data will test the timing of the next move.

Consensus expects January CPI to quicken and December industrial production to rebound strongly, more than reversing November’s decline. With the peso already performing well against the dollar, stronger‑than‑expected data could support another leg of MXN appreciation. 

Author 

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.