Sterling’s Stand, Euro’s Crossroads and Dollar’s Delicate Dance
GBP
Sterling experienced a morning sell-off but has since rebounded, with a keen eye on the upcoming UK labour market data set to be unveiled on Tuesday. As of the time of writing, GBP|EUR stands at 1.1626, and GBP|USD at 1.2722. Despite being the top-performing major currency in 2024, the momentum for Sterling might face challenges with the imminent data releases this week.
Investors and speculators are bracing for a notable downturn in wage growth, anticipating a further cooling of labour market conditions. This expectation is attributed to the impact of higher interest rates set by the Bank of England and the deepening cost-of-living crisis amidst stubborn consumer inflation. Of particular focus will be the Average Earnings data, as robust wage growth has been a key factor driving consumer price inflation in the United Kingdom.
Projections suggest a significant deceleration in Average Earnings excluding bonuses, dropping to 6.6% from the previous 7.3% growth in the quarter-to-October period. Meanwhile, earnings data, including bonuses, is anticipated to soften to 6.8% from the prior 7.2% in a similar timeframe. A noticeable decline in wage growth could alleviate concerns of persistent inflation and increase the likelihood of early rate cuts by the Bank of England.
Contrary to previous expectations extending until February 2025, the Bank of America is now predicting that the BoE might entertain the idea of cutting interest rates after its August monetary policy meeting. This outlook contrasts with the stance of BoE policymakers, who have not publicly discussed rate cuts. Their emphasis lies on maintaining elevated interest rates to ensure a sustainable return of inflation to the targeted 2%, especially given that consumer price inflation in the UK economy remains the highest among Group of Seven economies.
In addition to the labour market data, Wednesday brings the release of CPI figures, with the consensus for the Core CPI reading set at 4.9%, a slight decrease from the previous 5.1%. A positive surprise in the data is likely to propel the Pound higher. However, recent inflation releases have been less than impressive. Looking ahead to Friday, Retail Sales data is on the horizon, and any improvement beyond the consensus would contribute to the strengthening of Sterling.
EUR
The Euro is navigating a somewhat uncertain path this morning, lacking a distinct direction amidst the absence of noteworthy macroeconomic releases. The knee-jerk reaction in European markets, dipping into negative territory, coupled with lacklustre Eurozone data, is exerting pressure on the common currency.
Eurozone Industrial Production adhered to expectations with a contraction of 0.3% in December. However, the year-on-year production witnessed a more substantial decline of 6.8%, surpassing the anticipated 5.9% decrease. Meanwhile, Germany reported a Preliminary GDP decline of 0.3% for the year, down from the previous 1.8% increase. ECB President Christine Lagarde’s unexpected bearish tone on Friday, signalling the conclusion of interest rate hikes, is contributing to the subdued sentiment among Euro bulls.
The GBP|EUR pair has notably experienced a lack of volatility as of late. Analysts point out that the 50-day and 200-day moving averages are aligning, a phenomenon not witnessed in years.
This week’s spotlight will be on Eurozone CPI figures scheduled for Wednesday. Tuesday will also witness Germany’s ZEW economic sentiment index, potentially driving some much needed Euro volatility. In light of today’s discouraging GDP report, further economic uncertainties within the report could lead investors to reassess ECB interest rate cut expectations amid a sluggish economy, potentially restraining the Euro.
USD
With the bank holiday in the US today, the Pound regained the upper hand against the Dollar following a muted close to the first week of the new trading year. GBP|USD buyers jumped back into the game, as the monetary policy divergence between the US Federal Reserve and the Bank of England widened and checked the US Dollar recovery. Upside in the currency pair was likely capped by escalating geopolitical tensions between the West and Iran-backed Houthi rebels.
Dollar demand reduced, as markets continue to price in about a 70% probability that the Fed will cut the interest rate in March even after the release of higher-than-expected US Consumer Price Index (CPI) data in December. Data showed headline CPI rose 0.3% last month, for an annual gain of 3.4%, higher than the expected 0.2% and 3.2% respectively.
Turning to data releases out of the US for the week Wednesday sees the release of U.S. retail sales with the market looking for retail sales to rise 0.3% MoM in December, with any uptick looking to support the Dollar. Thursday sees housing starts released, also out at the same time is U.S. weekly jobless claims, where 207K claims are expected vs 202K previous. This release tends to give a view on how the labour market is evolving. The U.S. labour market has been steadily slowing but nevertheless remains robust and continues to frustrate Dollar bears looking for imminent Federal Reserve rate cuts.
Amid a bank holiday in the US today, the Pound regained its footing against the Dollar following a relatively subdued close to the first week of the new trading year. Buyers in the GBP|USD pair re-entered the market, seduced by the expanding monetary policy gap between the US Federal Reserve and the Bank of England. However, the upside potential in the currency pair might be deprived by rising geopolitical tensions between the West and Iran-backed Houthi rebels.
The demand for the Dollar waned as markets continued to factor in a roughly 70% probability of the Fed cutting interest rates in March, even after the release of higher-than-expected US Consumer Price Index (CPI) data for December. The data revealed a 0.3% month-on-month increase in headline CPI, translating to an annual gain of 3.4%, surpassing expectations of 0.2% and 3.2%, respectively.
Looking ahead to data releases from the US this week, Wednesday brings the release of US retail sales, with the market anticipating a 0.3% month-on-month rise in December. Any positive deviation is likely to lend support to the Dollar. Thursday will witness the release of housing starts, coinciding with US weekly jobless claims, where an expectation of 207K claims contrasts with the previous 202K. This release provides insights into the evolving labour market, which, despite a steady slowdown, remains robust, frustrating Dollar bears anticipating imminent Federal Reserve rate cuts.
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