The euro rally ended in resounding fashion yesterday, as GBP/EUR shook off a poor Tuesday to claw back much of its losses. Sterling was the bully in the playground on Wednesday as it bulldozed its way to a 0.5% gain over the US dollar at the same time.
The dollar is not one to pull its punches, and manufacturing data together with non-farm payrolls present an obvious chance to fight back later in the week. The euro, however, continues to be weighed down by expectations that the European Central Bank have had enough with high interest rates.
Speaking of which, let’s give the much-maligned central bankers their taste of the limelight. As expected, the Federal Reserve decided to hold interest rates at the 5.25%-5.5% range at its first meeting of 2024.
Few were expecting a cut at this meeting, so there was more attention on what the direction of travel would be. Chair Jerome Powell said he wasn’t viewing cuts at the next rate as a base case until evidence of disinflation became indisputable. He did however say that inflation and employment were “moving into better balance”.
The Fed’s decision to hold came after much lower private hiring numbers in January compared to December. That doesn’t add up to a crack in the US labour market, but it does at least show that the Fed’s policies are beginning to cool economic activity.
The Bank of England makes its interest rate decision today. It’s fair to say few people are expecting the 5.5% rate to budge, but markets will be hanging on each one of Mr Bailey’s words for an indication of when they can expect that.
There was good news out of Europe’s most unlikely problem child yesterday. Germany reported annualised inflation had fallen to 2.9% at January’s initial read, below forecasts of 3% and well below December’s 3.7%.
We’ll get an early peek at the eurozone’s inflation numbers for December this morning. While the numbers are only preliminary, the headline rate is expected to tick up to 2.9% from 2.8% and any overshoot would likely prove unpopular with investors.
The UK government has unveiled a set of measures designed to restore the power-sharing agreement in Northern Ireland. After a two-year power vacuum, the package was broadly welcomed by local politicians, as well as European Commission president Ursula von der Leyen.
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