The recent rally in the US dollar eased against most major currencies last week, as markets somewhat tempered bets in favour of higher Federal Reserve rates. The week was mixed overall. The dollar rose against most emerging market currencies following the surge higher in US yields, although it ended lower against almost all of its G10 counterparts, with the clear exception of the euro. Expectations for future Fed rate cuts continue to be pushed into the future, though FOMC chair Powell last week failed to acknowledge the possibility of a higher terminal rate than had been previously outlined. Meanwhile, a handful of currencies, such as the Swedish krona and the Mexican peso, outperformed on the back of respective central bank guidance toward higher rates in 2023. The FX market continues to be driven primarily by central bank stances and the resulting expectations for terminal short-term rates in the different currency areas. All eyes now shift to the data point that is itself the main driver of central bank expectations: the US inflation report for January, out on Tuesday. It is difficult to overstate the importance of this single data point, as traders and the Fed look for confirmation of the gradual downward trend of the past few months. The European flash GDP report for the fourth quarter (Tuesday), UK labour report (Tuesday) and inflation (Wednesday) are also on tap, but none of these reports will come close to the US inflation print in terms of market impact.


Investors have taken some comfort from the confirmation that the UK avoided recession in the last quarter of 2022. The UK economy posted flat growth in the final three months of the year, although the sharp downturn in December activity is a concern, and the outlook remains far from rosy. Sterling subsequently held its own against the dollar last week, while rising on the euro. Otherwise, data was rather light last week. This week is very different, and we expect to see some fireworks mid-week between the release of the US inflation report on Tuesday and the UK one on Wednesday. The UK labour report on Tuesday is also important, but for now markets remain focused on inflation prints. Consensus for a core inflation print (excluding food and energy) well above 6% bodes ill for the Bank of England latest attempt at a “dovish pivot”, in our view.


It was a very light week in terms of economic news out of the Eurozone last week. Retail sales were a touch on the soft side, and the German inflation print fell short of expectations. A handful of ECB members made public appearances, although none of them really delivered the hawkish messages that perhaps markets were bracing for, and the euro actually ended the week as the worst performer in the G10. This week should be similarly light in terms of news, as the fourth-quarter GDP report has been preceded by most individual countries’ reports and should not add much new information. In addition to the CPI print out of the US on Tuesday, President Lagarde’s speech this week should be the main drivers of market action.


Second-tier releases out of the US, including weekly jobless claims and consumer sentiment and CPI revisions were all consistent with the picture of strength painted by the payrolls report the prior week. Markets did, however, perceive Powell’s latest speech as dovish, as he failed to hint that the Fed was on course to raise rates higher than outlined in the bank’s December ‘dot plot’. We note, in particular, the slight upward revision to the December core inflation print. This, together with the recent rebound in high-frequency measures like used cars, means markets are bracing for another +0.4% monthly print in this key core index. This is roughly consistent with a 5% annual rate of inflation, far too high for comfort for the Fed, and we expect that rates will continue to see upward pressure as expectations for a 2023 rate cut fade further.