Dollar Dominates, BoE Hints, Euro Eyes Data: A Week of Key Events in Global Markets

US Market

The U.S. dollar resumed its upward trajectory against all major counterparts on Tuesday, maintaining stability on Wednesday. Importantly, this recovery does not indicate a reduction in investors' expectations of a FED's rate cut. On the contrary, the total number of expected basis points for rate reductions by the end of the year has increased from 135 to 140 since yesterday. The probability of a first quarter-point cut in March has risen from 60% to nearly 70%. Whether the dollar can sustain and expand its gains will likely hinge on the U.S. CPI numbers for December, set to be released today. The foreign exchange market is anticipated to remain cautious until Thursday's U.S. inflation report, which is considered the week's most significant event for FX markets.

Investors are preparing for today's crucial U.S. CPI report, expected to influence the Federal Reserve's stance in the upcoming January meeting. Economists predict a slight uptick in inflation from 3.1% to 3.2% for December. However, core inflation is anticipated to have cooled by 20 basis points to 3.8% by the end of last year. In other news, the US Securities and Exchange Commission has paved the path for the inaugural Bitcoin ETF, enabling the general public to trade the leading cryptocurrency with the same ease as stocks and bonds. This development took center stage on a day devoid of any significant tier 1 data releases.

UK Market

The Pound Sterling started the week with momentum, which tapered off by midweek, but upcoming events could introduce volatility to the FX market and potentially drive further gains against major currencies. The Pound to Euro exchange rate reached a 2024 high at 1.1650 but has retraced to 1.1630, returning a bit higher than the week's opening level. Despite soft German production data, the exchange rate failed to capitalize, although Eurozone unemployment hitting record lows justified some Euro resilience.

Wednesday afternoon saw Bank of England Governor Andrew Bailey's appearance before a parliamentary committee. While discussing financial stability, Bailey hinted at the importance of returning inflation to the 2% target. The BOE Official expressed concerns about 'exuberance' as a top financial stability risk. Attention now turns to Friday's GDP Data, as it could confirm an economic pickup into year-end. Market expectations for November's month-on-month GDP are at 0.2%, with a year-on-year rate of 0.1%. The rolling three-month figure is projected to be -0.1%. Positive data could propel the Pound higher, while disappointments might lead to GBP depreciation across the board.

Europe Market

The euro experienced marginal gains against the US dollar as market participants absorbed remarks from various ECB hawks, all while anxiously anticipating a pivotal US CPI release that might offer insights into the potential timing of Federal Reserve interest rate cuts later this year.

Luis de Guindos, the Vice President of the European Central Bank (ECB), delivered a cautionary message to the markets, suggesting that the eurozone economy is poised for another downturn in Q4 2023. Despite a recent uptick in inflation, he warned of persisting challenges in the upcoming months. Soft indicators pointed to economic contraction in December, with risks leaning towards downside growth in the near term. Having stagnated for much of 2023 and contracted by 0.1% in Q3, the eurozone economy is expected to see only a modest pickup in activity this year, with the World Bank forecasting 0.7% growth for 2024, up from 0.4% in 2023. The ECB faces a challenging decision in its upcoming January meeting on when to initiate rate cuts amidst a fragile economic outlook and inflation consistently above its 2% target. Isabel Schnabel emphasized the central bank's data-dependent stance, asserting that further evidence is necessary before considering rate cuts. Consequently, markets adjusted their policy easing expectations, no longer pricing in a rate cut in the first quarter of 2024.

With a lack of sustained bullish momentum, EUR/USD fluctuated within a narrow range of €1.0921 - €1.0981 ahead of this week's pivotal risk event. A downside surprise in US CPI could prompt investors to heighten expectations of a Fed cut. In such a scenario, EUR/USD might potentially surge above the €1.1000 level, heading towards December highs in the €1.1100s. Today is expected to witness increased market activity, driven by the release of the ECB economic bulletin, US inflation data, and initial jobless claims. The monthly report from the Bureau of Economic Analysis (BEA) may reveal a subdued inflation reading, attributed to the ongoing decline in goods prices. The Federal Reserve views this as a positive development, potentially bolstering the case for a rate cut in March. Economists anticipate a drop in the core inflation rate to 3.9%, marking the first sub-4% reading since early 2021. As the meeting approaches, markets are currently factoring in a policy easing of 150 basis points from the Fed for the year 2024.