It seems markets are looking for any reason to sell USD off at the moment, if price action on USD pairs since Thursday’s inflation numbers are anything to go by. In theory the combination of a higher-than-expected inflation number and heightened geopolitical tensions in the Red Sea should have caused the USD to gain. However, it was the lower-than-expected producer price inflation that caused markets to raise the odds of a Fed rate cut in March from 60% to now 88% - USD retreated off the number. GBP had a weaker day overall as economists believe that, despite a 0.3% uptick in GDP in November, the UK fell into a recession in the second half of last year.
* Daily move - against G10 rates at 7:30am, 15.01.24
** Indicative rates - interbank rates at 7:30am, 15.01.24
A quiet start to the week with the US observing a bank holiday for Martin Luther King Jr day today. But, GBP will be in focus this week with the release of job numbers tomorrow, with average weekly earnings expected to ease from 7.2% to 6.8%; inflation numbers on Wednesday (core inflation expected to ease to 4.9%), and retail sales on Friday (higher to 1.1%). GBP continues to be supported in markets as risk appetite continues to be relatively high, and expectations for rate cuts by the BoE are not as dovish when compared to its counterparts. Services inflation in the UK is one of the key measures for the BoE, and this is expected to come in at 6.1%, far too high for the BoE to start cutting rates.
From the EU this week, we have the latest ZEW survey as well as final inflation numbers in December, expected to show the core number to remain at 3.4%. ECB president Christine Lagarde will be speaking in Davos this week also, and we will be watching to see if she attempts to push back against dovish rate cut pricing – markets are currently pricing in 1.5% worth of cuts.
As mentioned above, markets are still not convinced that current pricing suggesting of 1.63% worth of Fed rate cuts this year is too extreme. This weeks, major data points from the US will be December's retail sales numbers, expected to have shown solid growth of 0.4% month-on-month. Overall USD seems likely to remain rangebound this week as markets continue to bet on a 81% chance of a rate cut in March, and it will need this to be reduced for a sustained gain on the currency.
Market pricing on rate cuts seems to be disjointed from data over the last few weeks. Hotter than expected job and inflation numbers this month have done little to alter where Fed rates will be, and currently the Fed are expected to cut rates first and cut the most this year. The BoE are expected to cut rates the least this year, but any signs that inflationary pressures are easing quicker than expected and we will likely see markets increase the amount of cuts expected, causing the differences between them and the ECB and Fed to reduce. GBP will come under pressure in this environment.
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