22/01 The week ahead for GBP,EUR and USD

After a subdued start to the session, the Pound staged a rally against the majority of its counterparts mid-week, buoyed by UK inflation data surpassing market expectations.

On Wednesday, headline inflation unexpectedly increased in December, reaching 4%, a slight uptick from the previous reading of 3.9%. This surpassed expectations that it would moderate to 3.8%.

The unexpected increase in inflation was welcomed by GBP investors as it tempered speculation of a Bank of England interest rate cut. This continued to support Sterling through Thursday’s session, despite a lack of UK data.

However, on Friday, UK retail sales revealed a significant 3.2% decline in December, far worse than the expected modest contraction of 0.5%.

As retail sales are often considered a key indicator of overall economic strength, Friday's data ignited new recession fears among economists and GBP investors. This ultimately weighed on the Pound at the end of last week's European session.

Looking ahead to this week, market-moving data will be limited for the currency pairing until Wednesday, which will bring the release of the latest UK flash PMI figures. Another decent expansion in UK service sector activity could give Sterling a boost.

EUR

The Euro faced volatility last week as a series of mixed data releases led to fluctuating movements in the currency.

On Monday, Germany reported a contraction in GDP for 2023, and Eurozone industrial production for November also showed a decline, contributing to a bearish sentiment for the Euro.

On Monday, Germany's GDP was confirmed to have contracted by 0.3% in 2023, and Eurozone industrial production also decreased by 0.3% in November. This confirmation of economic weakness in the Eurozone's largest economy contributed to a bearish sentiment for the Euro.

On Tuesday, Germany's final inflation rate for December was confirmed to have increased from 3.2% to 3.7%, and Germany's ZEW economic sentiment index rose from 12.8 to 15.2. Despite these positive indicators, the Euro traded mixed against its counterparts.

On Wednesday, Eurozone inflation data confirmed an increase last month. However, with the data meeting expectations, the Euro continued to trade erratically.

The European Central Bank's monetary policy meeting accounts were released on Thursday. While the minutes confirmed that the ECB did not approach the topic of interest rate cuts, officials discussed concerns over the economic outlook for 2024, denting the single currency.

The Euro closed the week slightly on the back foot, as Friday brought the release of Germany's latest producer price index. The index reported that PPI had declined more than expected in December, contracting by 1.2% rather than 0.5%, undermining EUR on the final day of the week.

Looking forward, Wednesday will see the release of Eurozone PMI figures. Analysts anticipate that the Eurozone surveys will reveal a further contraction in private sector activity this month. This could exert downward pressure on the Euro, raising concerns about the economic outlook for the bloc.

On Thursday, investors holding Euros will be closely monitoring the European Central Bank's interest rate decision. Any indications of a hawkish stance, particularly with respect to interest rate cuts, could potentially weaken the GBP/EUR exchange rate towards the end of the week.

USD

The US Dollar received additional support in mid-week trading from stronger-than-expected retail sales figures. However, as the market mood improved later in the session, the Greenback lost some of its shine.

Although a modest improvement in risk appetite weakened the US Dollar in the latter part of the week, the currency continued to receive support from better-than-expected employment and consumer sentiment data, ensuring it maintained strength until the end of the session.

The upcoming release of US GDP figures is anticipated to be a significant driver of movement in the Pound to US Dollar exchange rate in the week ahead.

The US Dollar exchange rate may experience volatility in the upcoming week, particularly following the release of the first estimate of US GDP for the fourth quarter. Analysts expect a significant slowdown in economic growth, from 4.9% to 1.8%. This potential deceleration could impact the US Dollar, leading to speculation about potential interest rate cuts by the Federal Reserve. Traders will likely closely monitor the GDP data for insights into the economic outlook and its implications for monetary policy.

In contrast, a deceleration in US growth could raise concerns about the broader global economy, leading to risk-off sentiment. In such a scenario, the US Dollar might see increased demand as investors seek safe-haven assets. The interplay between economic indicators, market sentiment, and geopolitical developments will likely shape the US Dollar exchange rate in the coming week.

The upcoming release of the core Personal Consumption Expenditures price index will be a key focus for USD investors. This inflation measure, closely monitored by the Federal Reserve, provides insights into consumer spending patterns and inflationary pressures. A higher-than-expected reading could reinforce concerns about rising prices and potentially impact the USD, while a lower figure might alleviate some inflation-related worries. Traders will closely analyze the data to gauge the Federal Reserve's potential policy adjustments and their implications for the US Dollar.

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Data for the week ahead

Monday

11.00 EUR German Buba Monthly Report

Tuesday

03.00 JPY BoJ Interest Rate Decision

09.00 EUR ECB Bank Lending survey

21.45 NZD Consumer Price Index

Wednesday

08.30 EUR German HCOB Composite PMI

08.30 EUR German HCOB Manufacturing PMI

08.30 EUR HCOB German Services PMI

09.00 EUR HCOB Composite PMI

09.00 EUR HCOB Manufacturing PMI

09.00 EUR HCOB Services PMI

09.30 GBP S&P Global/SIPS Manufacturing PMI

09.30 GBP S&P Global/SIPS Composite PMI

09.30 GBP S&P Global/SIPS Services PMI

14.45 CAD BoC Interest Rate Decision

14.45 USD S&P Global Composite PMI

14.45 USD S&P Global Manufacturing PMI

14.45 USD S&P Global Services PMI

16.30 CAD BoC Press Conference

Thursday

13.15 EUR ECB Monetary Policy Statement

13.30 USD Gross Domestic Product

13.45 EUR ECB Press Conference

16.00 EUR ECB’s President Lagarde Speech

23.30 JPY Tokyo Consumer Price Index

Friday

13.30 USD Core Personal Consumption Expenditures

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