15 January 2024

GBP

Somewhat surprisingly, GBP has emerged as the best-performing G10 currency this year*. Monetary policy was the main driver of currency strength last year, and the BoE's generally bullish stance may have provided the strong tailwind for the currency we saw in the final months of 2023 and now in 2024.

However, current disinflationary pressures could mean the BoE will be forced to reassess its monetary policy outlook and ease interest rates sooner or faster than expected. Markets are currently pricing in three further interest rate cuts this year compared to their expectations in December, meaning we could see as many as 1.25% cuts over the year.

The forecast for falling inflation has sped up significantly, which has led Deutsche Bank, Investec, and Oxford Economics to anticipate inflation to fall below the BoE target of 2% within four months. This could be a consequence of a reduction in energy prices.

The UK’s Claimant Count data will be released on Tuesday and is forecasted to increase to 18.1K. We’ll also hear from the Bank of England’s Governor Bailey tomorrow, who will be testifying on the UK economy in front of the House of Lords at 3pm. 

Later in the week, the latest UK CPI inflation is projected to fall slightly from 3.9% to 3.8% and Retail Sales are forecast to contract from 1.3% to -0.5% on Wednesday and Friday, respectively. These data releases could prove difficult tests for Sterling's strength.

EUR 

Last week saw the release of the latest Eurozone Inflation data, which jumped from November’s figure of 2.4% to 2.9%, below forecasts but against the general trend for the last 15 months. German Preliminary CPI came in at 0.1%, below the expected 0.2% on Thursday 4th January, but against the general trend again.

This week, we’ll see the Final CPI release, which is forecasted to remain at 2.9% and European Central Bank President Christine Lagarde speaking at various engagements throughout the week, including at the World Economic Forum in Davos.

The European Central Bank is due to meet on the 25th January. The probability of the bank cutting rates is only 3.4%, according to a Bloomberg forecasting model. However, the ECB is expected to reduce rates to 2.5% by December this year. Last month, projections were for rates to end 2024 at 3%, with markets pricing in two further cuts during the year in January. The Governor of Portugal’s Central Bank, Mário Centeno, made the news last week after he said that the ECB would cut rates sooner than it had recently thought and that it shouldn’t wait till May to decide.

USD 

Last week, the Headline US CPI data was released, showing that inflation rose to 3.4% in December. This was the most significant increase in three months and reflected higher housing and used vehicle prices that have seen an uptick recently. Core CPI inflation, which strips out the more volatile energy and food prices, on the other hand, cooled slightly from 4% to 3.9%.

We also saw tensions in the Red Sea escalate on Thursday and continue over the weekend, which has seen the cost of some shipping routes close to treble in recent days. This could further impact inflation and reignite supply chain issues across the globe if the situation continues. Because of its status as a safe haven currency, there could be some Dollar strength as a result, but there’s been no sign of this yet.

Taiwan’s presidential election also took place on Saturday, with the DPP winning an unprecedented third consecutive term. This could cause tensions between Taiwan and China’s Communist Party to ramp up, as China has previously threatened military action. It will be hard for the US to look the other way if it materialises. However, any escalation in tensions between China the US relations could significantly alter the geopolitical landscape. 

This week will start quietly on the data front, with the US celebrating MLK Day with a public holiday today. 

Later in the week, we’ll see the US payrolls report on Thursday at 1.30pm. This will likely be closely monitored by markets and the Federal Reserve, following the dovish interpretation of monetary policy meeting minutes earlier this month, a slew of softer economic data releases, and amid the ongoing volatility in Treasuries. 

Economists expect 180,000 jobs to be added for October and for unemployment to hold steady at 3.8%. Those additions would be significantly fewer than seen in the blowout September numbers when 336,000 jobs were added.

We’ll also see the US Empire State Manufacturing Index released on Tuesday, which is expected to increase from -14.5 to -4.9, and the latest Retail Sales data on Wednesday, which is expected to rise from 0.3% to 0.4%.

This is followed by the Preliminary UoM Consumer Sentiment on Friday, which is forecasted to fall from 69.7 to 69.3.

Markets have priced in another 50bps of cuts over the past month, so it will be particularly interesting to see how this week’s data from the US comes out against forecasts.

* Bloomberg World Currency Ranker

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.