Currency markets show signs of stability but interest rate uncertainty could drive volatility

Good morning

All in all the currency markets were pretty stable yesterday, GBPUSD did reach as high as 1.2375 in the morning but drifted steadily back to the 1.2320 area and held around there until this morning when a a bout of USD buying has taken the pair just below 1.2300,  EURUSD has tracked the move, got as high as 1.0455 yesterday but not sits at 1.0395. 

GBPEUR is currently 1.1830, unmoved by some press reports that the EU trade chief Sefcovic said EU would consider UK being part of a European customs area and says the ball is really in the UK’s court, adding that relations with the UK are much improved.  Sefcovic did add that EU will need to be careful in talks with US over trade.   Some doubt over the next couple of ECB rate moves, the general feeling is 25bps cuts in Jan and March although ECBs Holzmann has said it may be prudent to wait a bit before making further cuts.

GBP is perhaps struggling to get on a firmer footing after Goldman Sachs said they think the market is pricing too few UK rate cuts, and say they see six 25bps cuts by mid-2026 which would leave rates at 3.25%.  The moves would be in response to slow economic growth.  Meanwhile some reports suggest the Fed will struggle to cut rates further given the strength of the US economy and the somewhat persistent inflation running above target levels.  In fact there is a feeling the Fed may be forced to raise rates through 2025.

On the subject of rate movements, Norges Bank and CBRT make their rate announcements today.  Norges are expected to keep rates unchanged at 4.5% while CBRT could well bring rates down to 45% from 47.5%. 

Yesterday Arsenal put on another decent performance in the Champions league with a 3-0 win.  Man City were not so impressive, losing 4-2 having been 2-0 up.  Of course the major action takes place tonight where Spurs face Hoffenheim in the Europa League.  Spurs desperately need a win.  There is still potential for them to win three cups and get relegated, that would make for an interesting season.  Man Utd take on Rangers this evening. 

Overnight we’ll have Japan inflation numbers followed by the BoJ rate announcement.  A 25bps rise is widely expected which would take rates up to 0.5%.  USDJPY currently 156.50, GBPJPY 192.40.  I’d expect a rate rise itself may not be enough to push Yen higher but attention will be on comments in the statement which may give clues as to future rate moves.

Have a great day

-  09.00 Norges Bank rate announcement

-  11.00 Turkey CBRT rate announcement

-  13.30 US initial jobless claims

-  13.30 CAD retail sales

-  15.00 EU consumer confidence

-  22.00 AUS Judo Bank PMIs

-  23.30 Japan CPI

-  00.01 UK GfK consumer confidence

-  03.00 BoJ rate announcement

-  06.00 BoJ press conference

USD weakness persists as markets watch Trump

Good morning

We saw some renewed USD weakness take hold yesterday afternoon which helped push GBPUSD up from 1.2230 to a high of 1.2360 into the London close, while EURUSD moved up from 1.0340 to 1.0435, an area that has been tested a few times this week but has so far failed to break.  GBPEUR is a touch higher at 1.1840. 

Data released this morning shows UK government borrowing is higher than planned for this finanacial year and indeed December at £17.8bn was higher than the £14.6bn estimated in the October budget.  GBP did dip on the announcement but has since regained most of its immediate losses.

EU’s von der Leyen has said the EU will look to forge alliances with US although Reuters reports Trump has said he is willing to hit EU with trade tariffs.  Before we in the UK get too smarmy about no longer being in the EU, remember Starmer and his crew are absolutely not in Trump’s good books. 

Trump is also talking about renegotiating the Canada/Mexico trade agreement, and warns China of tariffs as he still sees China as being largely responsible for fentanyl imports.  China stocks traded lower overnight on the news.  He has warned Putin of more sanctions if he won’t negotiate over Ukraine, meanwhile both Putin and China President Xi have talked over video link, confirming a strong Russia/China relationship.

Both Canada and New Zealand reported inflation numbers yesterday, both came in on the weaker side.  NZD moved a touch lower against USD as the idea of a further 50bps rate cut was reinforced.  A slightly different story for CAD initially with USDCAD trading down from 1.4450 to 1.4410 on the release and then the weaker USD saw the pair trade as low as 1.4310 into the US close.  NZDUSD and USDCAD are now 0.5655 and 1.4330 respectively, and 2.1755 and 1.7665 against GBP.  

In football, Liverpool top the Champions league table with seven wins from seven after beating Lille last night.  Villa lost to Monaco making their qualification to the next stage less likely.  Barcelona came from behind to beat Benfica 5-4 in what sounds like an incredible match which saw penalties, late goals and a bizarre goal which saw the Benfica keeper kick the ball against the head of a Barca player, only for the ball to rebound into the net.  Arsenal and Man City play this evening.

Anyone complaining about the cold weather we are having should cast their eyes over to the US where snow storms are hitting southern states, something that is quite rare.  The unusually cold weather is also affecting more northern states, New York could see snow nearly two feet deep.  Even so, not quite on a par with Canada which suggests could see temperatures as low as -50°c in some areas taking wind chill into account.

Lagarde speaks later from Davos, no doubt she’ll be trying to promote EU’s position with the Trump administration, otherwise it’s a pretty quiet day on the economic data front.  Still, with Trump in full swing, the potential for more volatility certainly remains.

Have a great day

-  11.00 German Bundesbank monthly report

-  15.15 ECBs Lagarde speaks

-  18.30 ECBs Nagel speaks

-  23.50 Japan trade

Markets watching Trump's next moves

Good morning

The US dollar softened yesterday as one of Trumps officials confirmed tariffs would not be fully introduced on day one, GBPUSD traded yp from 1.2190 to 1.2325 in a straight line, EURUSD was also up from 1.0310 to 1.0430.  More volatility overnight saw GBPUSD down to 1.2260, up to 1.2340, then back down to the mid 1.22’a, where we are as I type, with EURUSD now 1.0355, leaving GBPEUR at 1.1830

Trump has certainly created numerous headlines from the 1,600 or so executive orders he has signed.  On tariffs, he has said Canada and Mexico could see 25% tariffs by the beginning of February, but says China will wait until further studies are complete.  This, along with his reversal of the TikTok ban, suggests he is already in negotiations with China.  CAD had gained yesterday, USDCAD trading down from 1.4460 to 1.4260 but has since pushed back up to that 1.4450 area.  We do have Canadian inflation numbers today which could add to the volatility in CAD.  The EU has avoided trade tariffs for now, Trump saying he’ll sort their trade deficit by EU buying more oil and gas from the US.

Energy, border controls, and US withdrawals from WHO and Paris climate accord were also key topics.  Trump also questioned Biden’s pre-emptive pardoning of his own family, which makes the Biden’s look incredibly guilty.   Trump himself has pardoned many including 1,500 or so from the 6 Jan riots.  He has called for NATO members to spend 5% of GDP on defence, and on Ukraine he seems confident he’ll have a discussion with Putin and put an end to the invasion, although I believe this would mean Ukraine has to accept Russia holds land it has taken so far.

UK unemployment this morning was slightly overshadowed by the ongoing dissection of Trumps first day, but on the whole they were mixed, with a lower than expected claimant count but an increase, as expected, to the unemployment rate.  GBP did dip initially but quickly reverted to pre-release levels.

Chelsea returned to winning ways last night, beating Wolves 3-1, which took Chelsea back into the top four.  It’s European action this week, Villa and Liverpool are both playing this evening.  Spurs play on Thursday, the Spurs manager’s job is certainly under threat and he’ll be hoping for a decent performance to get Spurs back on track.   

That’s about all for now, it’s a limited economic calendar today but there will be plenty of Trump watching instead as markets try to assess the impact of his second stint as President.

Have a great day

-  10.00 German ZEW

-  13.30 CAD CPI

-  21.45 NZ CPI