Sterling has definitely been King this week. Following a difficult start to the trading year, the Pound has gone from strength to strength this week. It started with Andrew Bailey’s speech towards the beginning of the week, in which he confirmed the need for the UK to keep hiking their interest rates, indicating a more hawkish outlook than in previous speeches. This has been helped by key speakers, from both the Fed and the ECB, taking a more dovish response in their respective speeches. This shift in economic projections from the Central Banks has helped the Pound go from the definite loser of recent trends within the market to the surprising underdog. Pushing the USD back the best part of 3% this week.

This is, of course, helped by the fact that CPI y/y came out as forecast, with inflation coming in at 10.5%. Slightly down from last month’s readings but still coming in at over 10%. A key statistic when analysing the likely aggressiveness of the next BoE interest rate decision. Whereas the noticeable, US and Eurozone data came out below par. US PPI and retail sales both came out considerably lower than expected on Wednesday. Most notably, retail sales, which dropped over 1% (-0.1% to -1.1% forecast to be -0.8%), showing that the Fed’s intensive base rate hikes are really starting to slow the economy.

This, coupled with the struggling Chinese economy, which is intrinsically linked to the USD (GDP in China sharply dropped to one of its lowest levels on record this week) has helped put the Dollar on the back foot. Due to this, trust in the US market has fallen to multi-month lows. Should this continue to appear to be the case between now and the 1st of February (next US interest rate decision), especially with inflation appearing to have now peaked, it will likely be a 25bp hike for the Fed. With similar data coming out of the Eurozone and a generally more dovish Central Bank leader in Christine Lagarde, a 25bp hike on the 2nd of February appears likely.

Retail sales for the UK came out this morning considerably worse, with it expected to be 0.5% and ending up coming out at -1%. This is a real indication that the economy is beginning to slow, and the public are beginning to feel the effects of the cost of living crisis. This leaves the BoE with a difficult decision, with inflation remaining above 10%, but other areas of the economy slowing down the choice for the 2nd of February becomes a difficult one. Do you opt for 50bp or 25 bp? In my opinion, I would suggest that a last rise of 50bp and then switching to 25b after that would be most prudent. The World Economic Forum in Davos has given an indication of how the Central Banks may opt. Andrew Bailey stated that he believes they are forecast to stop raising interest rates at 4.5%, down from 5.2% at the tail end of last year. This alludes to the fact that it will either be four 25bp hikes or one 50bp and two 25bp hikes.

As we look ahead, PMI Tuesday is by far the standout day of next week. We have PMI inflation data out in the UK, Eurozone and US, giving these three Central Banks one last opportunity to look at inflation before the following week’s Interest rate decisions. This will, of course, be a point of real volatility within the market. Traders will be watching for indications of what the Central Banks decision will likely be the following week. Therefore, we could, potentially, next Tuesday see more volatility than we do on interest rate decision days as traders position themselves for the week after. The Fed also have GDP, and unemployment figures out next week. This means the USD could be vulnerable next week, and competitors will be hoping to see real gains, with GBP/USD looking to push 1.25 and EUR/USD pushing for 1.10. Overall, I would envisage a week of extreme volatility as interest week looms.