Fraying Confidence

GBP: The Pound firmed over the course of last week, as persistently high UK inflation increased bets for hawkish interest rate hikes in the coming weeks. In fact, the Pound to Dollar exchange rate rallied close to six-month highs and could rise further in the days ahead if UK and U.S. economic data remains conducive to a continued rebound for riskier currencies. Looking forward, the British economic calendar offers the first readings of January’s activity numbers and will be watched closely to gauge the need for more stimulus from Sunak. Ultimately, Britain is still falling behind its peers in the race to spur economic growth and Prime Minister Rishi Sunak must act to boost investment, fix a lack of workers, and avoid chaos over post-Brexit rules.

EUR: The euro scaled a nine-month high on the dollar this morning as more hawkish comments on European interest rates contrasted with market pricing for a less aggressive monetary policy. In fact, ECB President Christine Lagarde, who last week pushed back against market bets that it would slow the pace of rate hikes given recent falls in inflation, is scheduled to make two appearances that could support the Euro’s recent gains. Furthermore, several European Central Bank officials are due to make appearances before policymakers enter their traditional pre-policy meeting blackout period on Thursday. Meanwhile, Eurozone data may give further indications of the health of the economy. The bloc is to release flash PMI data on Tuesday that is expected to tick higher, while the closely watched German Ifo business climate index on Wednesday is expected to improve for a second month.

USD: The dollar started the week testing a fresh nine-month low as market participants bet on the U.S. Federal Reserve trimming the size of its interest rate hikes for a second straight meeting in February. In fact, the dollar index was down 0.3% at 101.51, extending its losses from the previous week, and fully unwinding all of the gains it made since the Fed started raising interest rates last March. This follows a spate of weak economic data – with notable declines in retail sales and industrial production – which gave the impression that the U.S. economy slowed sharply at the end of last year. That’s likely to be visible in the first reading of U.S. Gross Domestic Product on Thursday, where the QoQ rate of growth is expected to slow to 2.6% from 3.2% in the third quarter. Ultimately, the data calendar should, in theory, keep the dollar on the soft side this week. However, investors are weary of whether the market is ready to add to short dollar positions ahead of next week’s FOMC meeting.