As the first working week of the year draws to a close, it’s evident that the Pound has demonstrated commendable strength, holding on to recent gains amid a scarcity of key UK data. Despite initial fears of substantial losses, the Pound exhibited resilience, staging a notable recovery.
The week commenced with a New Year’s Day bank holiday, contributing to subdued market movements until the 2nd. It was on this day that the Pound experienced a significant downturn, fuelled by escalating concerns over tensions in the Middle East. Consequently, the USD reasserted itself as the safe-haven currency, witnessing its most substantial gains against both the Euro and Pound since October of the previous year.
It is noteworthy that the US typically starts the year on a strong note, particularly in the initial three months. Key data releases on Wednesday from the US aimed to solidify and potentially enhance the Dollar’s position against the Pound and Euro. However, the initial employment data for the week fell only marginally outside expectations, leading to limited market impact.
Wednesday evening saw the release of the latest FOMC minutes, which, in essence, maintained the Fed’s ongoing narrative. The Federal Reserve believes that interest rates have peaked, and cuts in the coming year are likely. This has been a consistent stance for a while, contributing little to market movements but rendering the USD susceptible.
Thursday witnessed the Pound reclaiming positive ground against the USD, recovering much of the earlier losses. This was despite a brief setback following the release of the next set of US employment figures, with ADP Non-Farm Employment Change exceeding forecasts at 164k compared to the expected 120k. However, the rally was short-lived, and rates stabilised back within a narrow trading range.
Later today, the remaining US jobs data are set to be released, a crucial indicator for both the buoyancy of the US job market and inflation. This means there is potential for volatility around 1:30 in the afternoon.
Harmonised inflation in German states surged in December year-on-year to 3.8%, up from 2.3% in November. This uptick suggests that the ECB might find room to maintain interest rates higher than initially anticipated. German inflation data, being released a day before broader Eurozone inflation figures, is often regarded as a key indicator of how persistent inflation is on a wider scale. Therefore, we will now see particular interest in the Eurozone inflation data, out today at 10am, as we look to see if the chances of the ECB holding interest rates for longer than anticipated jump.
Looking ahead to the coming week, stability is anticipated until Thursday due to a lack of significant data points. However, Thursday brings the latest US inflation data, promising a likelihood of increased volatility. A slight uptick in inflation is expected, attributed to rising services and higher energy prices. Finally, early on Friday, the UK is scheduled to release its latest GDP figures. Despite expectations of these figures remaining in negative territory, barring any major surprises, it is likely to be already priced into the market and, as such, will see limited volatility.
