Market Commentary 2nd February 2026

Following Prime Minister Keir Starmer’s trip to China, he described the UK’s relationship with China as being in a “good, strong place” after talks with President Xi Jinping and Premier Li Qiang. The discussions covered trade co-operation, human rights concerns, and other bilateral issues. The UK government announced several agreements, including visa-free travel for UK citizens to China for trips under 30 days, halved import taxes on UK whisky, and collaboration on services, transnational crime, and illegal immigration. Pharmaceutical giant AstraZeneca also confirmed a $15bn (£10.9bn) investment in China through 2030. Starmer highlighted that the deals will make it easier for British businesses to expand in one of the world’s major economic markets.

The Bank of England’s Monetary Policy Committee is scheduled to hold its first meeting of 2026 on the 5^th of February. The session will likely the future direction of UK monetary policy amid ongoing global political uncertainty and a sluggish domestic economy, with expectations pointing to a cautious approach.

France’s economy grew by 0.2% quarter-on-quarter in Q4 2025, slowing from a 0.5% rise in Q3 and in line with market expectations, as softer domestic demand weighed on growth, with government spending growth easing and fixed investment losing momentum. By contrast, Germany’s economy expanded 0.3%, the strongest in three quarters and above forecasts of 0.2%, supported by higher household and government expenditure. Inflationary pressures in Germany also picked up, with the annual Consumer Price Index (CPI) rising to 2.1% in January from December’s 15-month low of 1.8%, slightly exceeding expectations of 2.0%, according to preliminary estimates.

The release of consumer confidence data appeared to suggest that Germany’s consumer sentiment improved heading into February, recovering from a near two-year low and exceeding market expectations. The rise was largely driven by a sharp rebound in households’ income expectations, suggesting that financial pressures on consumers are easing. In France, consumer confidence remained stable, matching expectations, but still below its long-term average. While households showed a slightly reduced inclination to save, their current ability to save improved modestly and their outlook for future savings remained unchanged.

The Federal Reserve left the federal funds rate unchanged at the 3.5%–3.75% target range in January, in line with market expectations, following three consecutive cuts last year that brought borrowing costs to their lowest level since 2022. Policymakers noted that economic activity continues to expand at a solid pace, job gains have remained modest, and the unemployment rate shows some signs of stabilisation, while inflation remains somewhat elevated. The central bank emphasised that future adjustments would depend on incoming data, the evolving economic outlook, and the balance of risks.

Labour market data showed resilience, with initial jobless claims inching slightly lower, while continuing claims fell more sharply, reaching the lowest level of outstanding unemployment since September 2024. Meanwhile, US producer prices accelerated 0.5% month-on-month in December, posting the largest monthly gain in three months. Services inflation rebounded, supported by a notable rise in machinery and equipment wholesaling margins, suggesting sustained underlying price pressures.

China’s industrial firms posted their first annual profit increase since 2021, reflecting a modest recovery in the corporate sector. Foreign-invested enterprises, including those backed by Hong Kong, Macao, and Taiwan, led the gains, while private firms remained largely unchanged. By sector, manufacturing and utilities posted solid growth, whereas mining profits fell sharply, highlighting uneven performance across industries.

In Japan, core consumer prices in Tokyo’s central wards rose 2% year-on-year in January 2026, down from December’s 2.3% increase and below market expectations. The reading marked a two-year low, aligning with the Bank of Japan’s 2% inflation target and reinforcing expectations that the central bank will remain cautious on further rate hikes. Consumer confidence improved modestly but stayed below forecasts, while the unemployment rate held steady at 2.6%, the highest since mid-2024, reflecting a slight increase in the number of unemployed.

GBP / EUR – Current 1.1549 Previous 1.1542

The pound rose 0.32% against the US dollar last week, supported by broad dollar weakness following the Federal Reserve’s decision to keep interest rates unchanged and comments from President Donald Trump signalling that the administration is comfortable with a weaker greenback. Against the euro, the pound gained 0.06%