22 January 2024

GBP

The GBP/EUR rate reached a 2024 high of 1.1680 last week, in line with levels previously seem in early December and September. This is only a cent below the annual high for the currency pair in 2023 of 1.1780 which could be attractive to euro buyers. 1.17 seems to be a new resistance level, so we may need some positivity in the UK to break through that barrier.

Sterling dollar has seen little movement so far this year and has remained rangebound around 1.27 levels. This may be shaped, in part, by contrasting data that came out last week.

Tuesday 16th January saw UK unemployment remain unchanged at 4.2%. While it's positive that unemployment hasn't increased over the last month, it is still 0.5% higher than the same time the previous year after it increased steadily throughout 2023.

This was then followed by Consumer Price Index headline inflation data on Wednesday, which surprised the markets by increasing from 3.9% to 4% and above forecasts of 3.8%. Core inflation (excluding volatile energy and food prices) also came in above expectations at 5.1%.

Although high inflation is generally considered to be unfavourable for consumers and the economy, it can have a contrasting impact on the currency. Higher inflation prompts the possibility of interest rate hikes or, in our current circumstance, delay the prospect of interest rate cuts. This has the potential to strengthen the pound, whereas earlier-than-expected interest rate cuts can put additional pressure on the currency. 

On Friday 19th January, December's Retail Sales data was released, showing figures falling significantly from 1.4% to -3.2%. Whilst this was less than expected, it seemed to be in line with the trend of tight consumer budgets, which saw more shoppers do their Christmas shopping earlier around Black Friday.

It is a quiet week for economic for the UK, with only this month's Manufacturing and Services Purchasing Managers Index (PMI) figures released on Wednesday. Markets expect a slight improvement from the Services data, which is anticipated to come in at 53.4 (above the key level of 50) and an increase in Manufacturing to 46.7, which is up from last month but below the key 50 threshold. Improvements in these indicators could positively impact the overall economic outlook, which could lead to a strengthening of the Pound.  

EUR 

The Interbank rate EUR/USD was almost 1.11 at the turn of the year, representing the highest levels for the currency pair since last July. However, since then, it has seen continued losses and now sits at 1.09. The lowest level we saw for EUR/USD in 2023 was in September, when it dropped to 1.04. This could show the single currency can fall further if the trend continues.

Last week was quiet for the euro with ECB President Christine Lagarde speaking at Davos and the release of German inflation data, which remained at 3.8%.

This week, some more significant releases are expected. Manufacturing and Services Purchasing Managers Index data is scheduled on Wednesday for France and Germany. Markets expect very gentle improvements in both Germany's manufacturing and services sectors. Data for the EU overall is expected to see similar results; however, none of the metrics are forecast to fall above 50, which would mean the industries are still contracting which might put place additional pressure on the Euro. 

The ECB will make its latest interest rate decision on Thursday, with markets anticipating it will remain at 4%. The subsequent press conference will likely offer more insight into the ECB's monetary policy strategy.

USD 

The US presidential elections are heating up as Republican candidate Ron DeSantis pulls out of the race, stating there was "no clear path to victory". He positioned himself as offering a similar agenda to Republican frontrunner Donald Trump without the "drama and baggage" but did not gain enough support in recent polls.

This will make for an interesting battle for the current Democrat candidate and incumbent president, Joe Biden, especially considering the lawsuits and ongoing investigations into Trump.

This could weigh on the US dollar's value due to the political uncertainty this creates. However, we could be looking at a similar story in the UK with a large question mark over whether Labour has enough swing to oust the Conservatives. This could prompt more volatility for GBP/USD this year after a relatively flat 2023, which saw just a 13-cent swing from top to bottom.

Manufacturing and Services Purchasing Managers Index data is due to be released in the US on Wednesday, too, with Manufacturing predicted to remain flat at 48 and Services declining slightly to 51.

The most significant event of the week will likely be on Thursday, with US GDP for Q4 expected to see a substantial revision lower, dropping from 4.9% to a revised 2%. This could cause USD weakness if data lands as currently forecast.

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