The dominant theme in currency markets in 2024 has been US economic strength, which is forcing markets to push back the timing of Federal Reserve rate cuts and is helping the dollar unwound most of the losses it suffered in late-2023. Last week did not buck the trend. While the Fed January meeting did not move currency markets much, a blowout labour market report out of the US forced interest rate traders to push back the timing of the first cut from March till May. The fact that this economic strength is not matched elsewhere in the world is fuelling the dollar rally, which rose last week against most major currencies, including all of those in the G10. This week is exceptionally light in terms of both major data releases and monetary policy events in the main economic areas. The aftermath of last week’s Fed hawkishness, and evidence of an accelerating US economy, may keep most world currencies on the back foot against the US dollar, as we await the all-important inflation number from the various economic areas in mid-February. We maintain that these data points continue to be the key to medium-term currency movements.

GBP

The Bank of England’s Monetary Policy Committee edged slightly closer to a dovish stance last Thursday, as one member shifted from voting to a hike to a neutral stance, and another from neutrality to voting for a cut. However, the consensus position at the MPC is that while rates have reached their cycle high, there is little appetite for immediate cuts and the first cut will not come before the summer at the earliest. The growth forecasts were also revised upwards, with the bank saying that UK inflation would pick-up again after the second quarter. Meanwhile, sterling continues to benefit from the highest short-term rates in the G10, as well as the modestly better economic data that we are seeing recently, at least compared to other European countries. Next week’s fourth quarter GDP data will be interesting in this regard, as there remains a very reasonable chance that we could see the confirmation of a technical recession.

EUR

Data last week confirmed that the economy of the Eurozone as a whole stalled both in the last quarter of 2023 and for the entire year, though it managed to avoid a technical recession. Inflation in January continued its downward trend, albeit the core number came in slightly above market expectations.

Overall, and absent an unexpected rebound in inflationary pressures, we think it is likely that the European Central Bank will cut rates ahead of the Bank of England and the Federal Reserve, though probably not till April. Swap markets are largely in agreement, with an April cut roughly two-thirds priced in. Focus this week will be on the latest PMI numbers (Monday), followed by December retail sales (Tuesday) and speeches from ECB members, including chief economist Lane, on Thursday.

USD

The dollar rallied only modestly after Wednesday’s Fed meeting, in spite of Chair Powell’s strong pushback against market timing for interest rate cuts. While the statement removed the line that further hikes may be needed, it also stressed that additional evidence would be needed on inflation. During his press conference, Powell also said that a March rate cut was unlikely, signifying an unusually explicit piece of forward guidance.

However, the blowout January labour market report, with strong rebounds in job creation and wages and a fresh drop in the unemployment rate, finally forced traders to pare back to near zero the chances of a March cut and send the dollar higher. This week we could see some fireworks when the scheduled revisions to past CPI data to be released Friday.