What's next for GBP,EUR and USD

GBP

GBP started last week on the back foot after the UK's finalized manufacturing Purchasing Managers' Index for December was recorded at 46.2.This marked a decrease from November's 47.2 and fell 0.2 points below the forecast. The persistent weakness in the sector dealt a blow to the markets, with diminished output and a decline in new business adversely affecting industry vitality.

On Wednesday, concerns about a potential recession limited GBP gains in certain exchange rates, although the Pound managed to strengthen against the Euro. The Institute of Directors' (IOD) latest confidence index revealed a continual increase in the number of business leaders expressing pessimism about the economic outlook since June, adding to the dampening effect on Sterling morale.

On Thursday, the Bank of England's (BoE) consumer credit reading surged to £2.005billion, surpassing the expected £1.4 billion. This news seemed to exert downward pressure on the Pound, underscoring challenges in household finances. The conclusion of the week presented a blend of signals for the UK's economic well-being: new car sales witnessed an increase, albeit less than expected, and the country's latest construction PMI also climbed more than anticipated. Conversely, a spike in house prices underscored a scarcity of properties on the market, with homeowners hesitant to sell due to the potential for higher mortgages.

The Pound is expected to exhibit subdued trading at the start of the week in anticipation of the upcoming GDP data scheduled for release on Friday. Forecasts indicate a potential 0.2% expansion in the UK economy for November, which could bring optimism to GBP investors and bolster the Pound. However, the three-month average is predicted to reveal a 0.1% contraction, potentially curbing gains for the GBP.

In the end, indications that the UK is steering clear of an economic recession might suffice to garner investor support for GBP exchange rates.

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EUR

The Euro encountered brief moments of support on Monday, despite subdued trading due to market closures for New Year's Day. Overnight, EUR/GBP experienced a decline, but the Euro regained some of its losses on Tuesday as finalised manufacturing Purchasing Managers' Index from Germany and the Eurozone surpassed expectations.

Limiting gains for the single currency, however, was the persistent fact that business activity continued to contract across the bloc. Both manufacturing indexes reported solid and accelerated decreases in output and employment.

In the middle of the week, Germany's unemployment rate for December inched up as anticipated to 5.9%, casting a shadow over Euro optimism. Nevertheless, the number of individuals registered as jobless was fewer than expected, leading to limited bullish sentiment. Andrea Nahles of the Federal Employment Agency stated: ‘The labour market is still holding up well in terms of the extent of the burdens and uncertainties.’

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On Thursday, German inflation increased from 3.2% to 3.7% on an annualized basis, potentially fueling expectations of a more hawkish stance from the European Central Bank.

Similarly, inflation increased across the bloc according to Friday's data, but modest gains for the Euro were not sustained. Instead, the EUR weakened slightly against the Pound as Christine Lagarde of the European Central Bank cautioned about prolonged higher price pressures.

This week is relatively quiet in terms of data releases for the Euro, with the only notable release being Retail Sales scheduled for Monday morning. Due to the absence of significant data, the direction of the Euro exchange rate may be contingent on US data releases, especially with the upcoming release of the latest US inflation data on Thursday.

Indicators reflecting the condition of US finances have ripple effects across global markets, given the country's status as the world's largest economy. If core inflation declines on an annualized basis, as anticipated, expectations for a dovish stance from the Federal Reserve may intensify, potentially portraying the US Fed less favorably compared to other more hawkish central banks.

The Euro could experience strength if the US Dollar weakens, considering the robust negative correlation between the single currency and the Greenback. In such a scenario, EUR/USD may see an upward climb.

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USD

The US Dollar made a strong start last week, gaining momentum as risk appetite diminished at the beginning of the new year's trade. Functioning as a safe-haven currency, the USD received support from investors shifting away from risk-on assets.

Nevertheless, the Greenback experienced a decline on Wednesday after the latest Federal Open Market Committee statement. The indications were that Federal Reserve officials believe interest rates are at or near their peak.

Consequently, speculations of imminent interest rate cuts from the Fed exerted downward pressure on the 'Greenback' on both Wednesday and Thursday. Subsequently, the US Dollar managed to recover some losses as US labor data surpassed expectations.

On Friday, the Greenback initially surged following the latest non-farm payrolls data. The number of jobs created in December exceeded economists' forecasts, with the reading at 216,000, surpassing estimates of 170,000. However, the US Dollar was unable to maintain this strength following the latest ISM services index. In December, activity in the sector experienced a notable slowdown, with the reading dropping significantly from 52.6 to 50.6. Consequently, the Greenback concluded last week on a downbeat note.

Looking ahead for the US Dollar, the start of the week's session is expected to be uneventful for USD investors due to a lack of substantial data releases. Consequently, risk appetite may become the primary driver of movement as investors anticipate new catalysts later in the week. Bearish trade sentiment could potentially strengthen the safe-haven currency.

On Thursday, the upcoming release of the latest Consumer Price Index (CPI) data is anticipated. In December, economists forecast that core inflation may have moderated from 4% to 3.9%, while headline inflation is expected to have accelerated to 3.2% from 3.1%.

Should the data align with expectations, the decline in core Consumer Price Index(CPI) could take precedence over the headline reading. This is because core CPIexcludes the more volatile elements of inflation, and a decrease in this metric would imply ongoing moderation.

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Data for the week ahead

Monday

07.30 CHF Consumer Price Index

10.00 EUR Retail Sales

23.30 JPY Tokyo Consumer Price Index

Tuesday

00.30 AUD Retail Sales

Wednesday

00.30 AUD Monthly Consumer Price Index

Thursday

00.30 AUD Trade Balance

13.30 USD Consumer Price Index

Friday

01.30 CNY Consumer Price Index

13.30 USD Producer Price Index