It’s set to be a much quieter week on the economic calendar, but there’s still plenty for markets to mull over after last week’s slew of Central Bank hikes and Friday’s unexpectedly strong U.S. nonfarm payrolls report. In fact, data in the Eurozone and the U.K. will be closely watched.
GBP: The British Pound stumbled out of the gates last week as a lack of UK economic data and a downbeat market mood left Sterling vulnerable to losses against the US Dollar and the Euro. In fact, stronger headwinds hit the Pound as the week went on. Public-sector strike action continued to intensify and company insolvencies hit their highest level since 2009. Furthermore, markets expected the Bank of England to hint at an end to its tightening cycle at its Thursday meeting, and they were proved right. The BoE hiked rates by 50-basis points but signalled it may raise rates in smaller increments, if at all, in future meetings. Looking forward, UK economic data is in short supply through much of the week. As a result, the increasingly risk-sensitive Sterling could be primarily influenced by market mood through much of this week’s trade. Domestic news could also impact GBP. More downbeat headlines about the UK economy, worries about intensifying strike action, or political scandal and instability could add to a general sense that the UK is in a challenging situation, which may make Sterling a less attractive investment.
EUR: The Euro found some support this morning as Eurozone’s largest economy recorded monthly growth in its factory orders of 3.2% in December, a rebound from the revised slump of 4.4% the previous month. However, looking at the week ahead, the Euro could face selling pressure early on. Economists expect Eurozone retail sales to have slumped in December, with a forecast decline of 2%. This could raise concerns about a potential Eurozone recession, thereby denting EUR exchange rates. Moreover, a forecasted contraction in German industrial production on Tuesday could add to EUR’s woes. Ultimately, Germany is the largest economy in Europe, and manufacturing is a key part of the country’s economy. Signs of declining activity could add to Eurozone recession fears.
USD: The dollar held firm this morning after Friday’s strong U.S. jobs report suggested the Federal Reserve could stay hawkish for longer. In fact, the U.S. Labour Department’s closely watched employment report showed that nonfarm payrolls surged by 517,000 jobs last month; economists in a Reuters poll had expected a gain of 185,000. Consequently, the Dollar Index strengthened 1.1% against a basket of currencies, touching a 4 week high of 103.22. The Fed on Wednesday raised rates by 25-basis points and said it had turned a corner in the fight against inflation, leading investors to price in a more dovish path going forward. However, the eye-popping payrolls number along with U.S. services industry rebound in January have investors questioning whether the Fed is almost done with its monetary tightening policy.