Sterling’s Steady Surge, Euro’s Resilience, and Dollar’s Dynamics
GBP
Last week witnessed a rally in GBP|EUR up to 1.1660, spurred by the release of PMI figures surpassing expectations. However, the pair faced resistance at the key 1.17 level, which it couldn’t breach. The disappointment in Eurozone PMI numbers further added to Sterling’s strength. Although it fell short of reaching 1.17, the upcoming release of UK inflation figures holds the potential for a breakthrough. GBP|USD continues its bullish run off the back of positive UK data and remarks from the US Fed around being the first western central bank to cut interest rates sooner rather than later. At the time of writing GBP|USD currently sits at 1.2740.
The UK services sector marked a significant achievement, reaching a 6-month high in December, showcasing a robust performance. On the other hand, the Eurozone economy continued to struggle, remaining in contraction territory. This divergence lent credibility to the Bank of England’s hawkish rhetoric, while raising doubts about the feasibility of the ECB’s stance.
The spotlight for the week ahead falls on UK inflation data, poised to reinforce the recent GBP-supportive narrative if it exceeds expectations. Scheduled for release on Wednesday, the CPI inflation is anticipated to be 4.4% year-on-year, a slight dip from the previous 4.6%, with the core CPI reading expected at 5.5%. However, a potential undershoot in the data might exert pressure on the Pound during the midweek session.
As the week concludes, attention shifts to UK retail sales and GDP figures due on Friday. Market expectations for retail sales are set at -1.1% year-on-year for November. Meanwhile, quarterly GDP is anticipated to remain flat at 0% quarter-on-quarter in the third quarter.
EUR
While the Euro has displayed a weakening trend against the Pound, it has seen upward movement against the majority of its G10 counterparts as of late. This shift follows a consensus among ECB policymakers, contributing to a more hawkish sentiment. Additionally, the final Eurozone inflation report, aligning with expectations, played a role in the Euro’s higher standing.
The confirmed consumer price index for the Eurozone revealed headline inflation at 2.4%, marking a decline from the previous 2.9% and representing the lowest figure since July 2021. Despite this decrease in inflation, the Euro has found strength against certain peers. The supportive backdrop can be attributed to yesterday’s hawkish remarks from ECB officials, who collectively resisted speculations of rate cuts.
Looking ahead at the data calendar, a notable event for the Euro is the release of Germany’s consumer confidence index tomorrow. The outcome of this release holds significance for the European currency. A result in line with predictions or an improvement in household morale better than anticipated could provide further support to the Euro.
USD
The dollar index, gauging the currency’s strength against a basket of six counterparts, experienced a brief rebound last week. This shift occurred following comments from New York Federal Reserve (Fed) Bank President John Williams, who emphasized that speculating on rate cuts is premature as the central bank is not currently engaged in such discussions. However, the overall appeal of the Dollar remains subdued, given that the Fed stands out among western central banks, being at the forefront of discussions regarding rate cuts in 2024.
In the previous week, median projections from Fed policymakers indicated a potential reduction of interest rates by 75 basis points in 2024, coinciding with the core Personal Consumption Expenditure price index dropping to 2.4%. US Treasury yields continue to linger near multi-month lows, with the 10-year benchmark struggling to surpass the 4% mark, and the 30-year long bond is on the verge of breaking below the same level.
Adding to the narrative, San Francisco Fed Bank President Mary Daly on Monday expressed the view that lowering borrowing costs in 2024 would be appropriate, given the progress in inflation declining toward the 2% target this year. As we delve into the US data landscape this week, attention is directed toward Thursday’s Q3 GDP (Annualised), predicted at +5.2%, and Friday’s Core Personal Consumption Expenditures, forecasted at 0.2% (MoM) and 3.3% (YoY).
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