Currency markets have executed a 180 degree turn so far in 2024, as have financial markets generally. The furious bond rally in the last few weeks in 2023 has stopped in its tracks and reversed, as markets pare back expectations of Federal Reserve interest rate cuts in 2024. Markets dutifully followed the leads from interest rates: risk assets and commodity fell, and the dollar rose against every major currency with the notable exception of the Mexican peso, which built on its stellar 2023 performance to end up higher against every other major currency. Attention this week is focused on the most important number for markets worldwide: the monthly CPI inflation print in the US, out on Wednesday. Markets are expecting a further moderation in the YoY core number, and any upward surprise will make it hard for the Fed to ease in March, adding fuel to the recent dollar rally. The monthly GDP print out of the UK and a number of speeches by Federal Reserve and ECB officials will round out the week, as trading volumes pick up from the holiday torpor.

GBP

Sterling was the only G10 currency that managed to match the dollar’s rise last week, ending higher against every other major currency. Two factors are contributing to the pound’s outperformance: resilience in consumer demand, evidenced in recent economic activity data, and Bank of England relative hawkishness, which results in the highest interest rates in the G10 and a comparatively slow timetable for cuts in 2024. This week the focus will be on the November GDP report, out on Friday. Economists expect to see a healthy rebound relative to October’s contraction, which would be consistent with the rebound witnessed in the business activity PMI numbers. A technical recession as early as the final quarter of last year remains a possibility following the downward revision to the Q3 data, although we are quietly confident that this will be avoided once the official data for Q4 is released in the middle of February.

EUR

The tug of war between the European Central Bank’s apparent hawkishness and the poor economic performance in the Eurozone continues. December inflation numbers were mixed. The headline index rebounded as energy subsidies were removed, although the more important core index continued on its downward trend, and is now squarely below the ECB’s repo rate. This week, there is not a lot of economic data on the docket. Focus among investors will be on speeches by ECB officials, especially chief economist Lane, who is expected to provide clarity on the ECB’s view of recent Eurozone economic weakness and its impact on monetary policy. Financial markets continue to see a decent chance of a start to easing in the Eurozone in the first quarter, although these expectations continue to be pushed further into the future in line with the broad repricing globally.

USD

A mixed payrolls report for December offered some contradictory signals: steady job creation and healthy wage growth in the establishment survey, contrasted with a sizable drop in labour force participation in the household one. Investors initially reacted to the strong December job creation number by sending the dollar higher, although the greenback quickly reversed course on realisation that the 71k downward revision to the October and November data more than made up for the upside surprise in the final month of the year. All in all, the US labour market continues to enjoy full employment, but signs of cooling are accumulating. All this will be overshadowed by the key December CPI inflation report on Wednesday. A two-in-three chance of a March cut from the Federal Reserve currently priced in by markets still strikes us as too high, and this week’s inflation number will go a long way towards settling the debate.