Good morning,

USD: Can the dollar recover?

Last week was an aggressive one for the US dollar with comments from Commerce and Treasury Secretaries Ross and Mnuchin on trade and a weaker dollar being confirmed by President Trump in his Davos address on Friday. The USD has rallied a little over the weekend as US debt yields rose but it still remains at significantly weakened levels.

Wednesday’s Federal Reserve meeting is the key for the US dollar this week. No policy change on interest rates is expected quite yet and any changes in the accompanying statement will likely reflect the fact that last year’s hurricane season is no longer having an effect on the data. This will be the last policy meeting that will be chaired by Janet Yellen before Jerome Powell takes the helm on February 1st.

We receive the latest inflation numbers from the US this afternoon with prices set to rise by 1.6% on the year to December. At the moment that is enough for 2 or 3 rate hikes from the Federal Reserve this year but we can only be more confident of a 4th rate rise in 2018 if inflation is driven higher by wages.

GBP: Politics taking the shine off the apple

Sterling has slipped a little lower over the weekend against both the dollar and the euro with the political atmosphere taking some of the wind out of the pound’s sails.

Friday’s initial reading of UK GDP in Q4 may have beaten analyst’s estimates in growing by 0.5% in the 3 months to the end of the year however the overall picture is still one of lost opportunity. While global growth is starting to strengthen the UK is only able to present the worst number since 2012. The UK economy is in a chronic crawl at the moment whilst the rest of the world is enjoying a significant skip higher in growth.

Growth also remains uneven with the services sector contributing nearly all of this growth and the construction sector still in recession having contracted for the 3rd consecutive quarter. Manufacturing grew by 1.3%, but this is still aneamic given the growth profile of the EU – the sector’s biggest client – and the devalued pound.

On growth fundamentals alone we see little reason for the Bank of England to be talking up the possibility of additional interest rate hikes; recent housing and mortgage numbers have shown that the November rate hike has hurt the sector. Inflation will likely drift back to target as the effect of the sudden sterling devaluation drifts out of the inflation basket and while wages may move higher, they are still in negative real territory and will likely be so for most of the first half of this year.

EUR: At the top of the range

EURUSD remains close to the top of its recent range of 1.25 and while the fundamental and technical picture points to a US dollar bounce back, we can easily see the EUR getting its skates and tearing higher. ECB Governing Council member Knot said on Sunday that the ECB’s quantitative easing programme has to end “as soon as possible”. It “has done what could realistically be expected of it. We don’t have to communicate yet that it will be over after September, but I think that’s where we’re headed.” More policy makers uttering similar things will only prompt the euro higher.

Have a great day