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FX Majors Weekly Report January 8th

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GBPEUR

Sterling retains a slight edge over the euro, both fundamentally and technically, as the Bank of England’s tendency is toward communicating a less dovish message than the European Central Bank, and some pockets of eurozone data remain weaker than the UK. This week, the UK takes the limelight with all eyes on Governor Andrew Bailey’s testimony to the Treasury Select Committee on Wednesday along with Friday’s GDP release.

In the UK, the pre-Christmas fall in headline inflation to 3.9% perhaps caused an overreaction in market expectations towards rate cuts. Bailey, testifying this week, may push back on this slightly, as inflation is still twice the target and reaching 2% may take longer than expected. Some economists think 2% will be reached by April, but Bailey will likely warn of the risk that this may not happen. The big market reaction, therefore, will be if Bailey ‘does a Powell’ and communicates a very dovish message. This could easily drag sterling down by 150 pips across the board, were it to occur. Later in the week, a more positive GDP print is expected after the miss seen in December, although this is unlikely to cause much sterling volatility unless a big miss is seen.

GBPUSD

As market participants start the first proper full week of 2024, the focal points remain: disinflation, rate cut timing, inbound data, geopolitics and long-term political developments in a year when 40% of the world’s population goes to the polls. This week has a dusting of a few of these factors. Firstly, the Bank of England Governor Andrew Bailey will be testifying to the Treasury Select Committee on Wednesday and UK GDP will be released on Friday. Secondly, Thursday’s CPI (inflation) release in the US will serve as an additional highlight for the week ahead.

Before Christmas, the larger-than-expected drop in inflation to 3.9% called into question the notion that the BoE may leave rates higher for longer, beyond that of the European Central Bank and the Federal Reserve. As such, Bailey’s testimony on Wednesday will be of interest to markets as this will be a discussion point. The UK consumer is, of course, waiting in hopeful anticipation for a series of cuts this year, but when, how many and by how much remains the moving target. Anything from two 0.25% cuts, to double that, remains possible.

After a weaker-than-forecast month-on-month GDP print in December -0.3%, Friday’s fresh print will be of interest, with a positive +0.2% anticipated.

EURUSD

The euro remains in a technical uptrend versus the US dollar. With a light data schedule from the eurozone this week, price action will be predominantly at the mercy of the top tier dollar news, which is dominated by Thursday’s CPI (inflation) release from the US.

Eurozone data continues to highlight Germany as the ‘problem child ‘of the economic region. Just this morning, German industrial orders missed expectations by some margin at 0.3% versus the anticipated 1.1%. Recently released retail sales data showed rises in Spainof 1.5%, France of 0.4% and falls in Germanyof -2.5%! However, with positive real wage growth and a strong labourmarket, the eurozone can still see some meaningful GDP growth of +1%in 2024, just as the US is showing signs of slowing. The euro has priced in a lot of negative news and shows resilience despite some poor data. With an uptrend in place, but volatility low, the expectation is for further upside in near-term price action, with larger moves likely to be expedited by Thursday’s US CPI release.

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