Markets appear over-invested in rate cut expectations.
Daily Currency Update
The pound had some decent gains vs the Dollar and Euro after inflation came in at 4%. This stronger-than-expected reading in core and services inflation will give the Bank of England a moment of pause before initiating interest rate cuts this year.In Europe officials from the ECB have also been talking down rate cut expectations. President Lagarde said yesterday in Davos that services sector inflation remains above 4% which will need to come down before the ECB can even consider rate cuts. The Euro fell today on foot of this, and European Equity markets shed over 1%
Retail sales in the US smashed estimates rising by 0.6% in December bringing yearly growth to 5.6%. Yields in US Treasuries continue to remain firm lending support for the Dollar. Additionally, Fed member Waller suggested they are in no rush to begin lowering rates. It seems that markets have become significantly over-invested in rate cut expectations which have begun to unwind this week.
Key Movers
In the UK the Pound could remain stable as investors reduce expectations for interest rate cuts this year. However, this is likely to be short-lived as markets return to watch economic growth more closely. On Friday UK retail sales are due and will be watched closely for signs of a cooling economy.The Euro remains beleaguered with Eurozone’s largest economy, Germany, showing significant signs of slowing down. The ECB expects interest rate cuts to be entirely data-dependent and will be watched closely by the Central Bank.
In the US, ten-year Treasury yields climbed to 4.129% on Wednesday reflecting the market's alignment with the Federal Reserve’s cautious policy outlook. Both retail sales and industrial production continue to climb higher in an economy, showing no signs of cooling down. The US Dollar could remain firm on foot of this data.
Expected Ranges
- GBP/USD: 1.0830 - 1.0930 ▼
- GBP/EUR: 1.1600 - 1.1700 ▲
- GBP/AUD: 1.9300 - 1.9400 ▲
- EUR/USD: 0.8525 - 0.8625 ▲