Market Update

The second-best performing currency after the USD of 2024, the pound, is about to face a couple of key data tests this week. Tomorrow, jobs data for January is released, and Wednesday sees the CPI report and Thursday GDP data. Some analyst believe that both wage growth and services inflation could remain sticky in the first quarter, meaning that the Bank of England will have no rush to turn to a more dovish communication in the near future. Markets are expecting the BoE to move with a delay (in August) compared to the ECB’s and Fed’s easing cycles. The short-term outlook remains quite positive for sterling.

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The number of comments by European Central Bank (ECB) officials has intensified recently, and so has a divergence in views expressed by different members. Fabio Panetta, the most dovish voice in the Governing Council, endorsed rate cut expectations, saying that the time for monetary easing is “fast approaching”. That unsurprisingly differs from the latest remarks by Isabel Schnabel (a hawk), who warned against cutting too early, but also from more dovish members like Mario Centeno and Pablo Hernandez de Cos, who still seem to prefer caution over dovish guidance. Despite some voiced unhappiness from doves like Panetta, consensus among policymakers appears to be favouring holding rates should at least until April’s European wage statistics. June looks increasingly likely as the starting date for monetary easing, and markets are also buying this view with increasing confidence.

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The convergence of US and Eurozone rates could be the biggest driver of the EUR/USD pair this year. US CPI will be the big highlight for the pair this week, while the eurozone calendar’s main release is tomorrow’s ZEW survey out of Germany. The US dollar index has eased back modestly over the past week after trading at its 2024 highest. The repricing of rate expectations following the hot US payrolls figures has offered some continued support in the dips to the dollar: this week, the US CPI release (tomorrow) could be the new catalyst for more market movement.