Sterling continues its strong run against the US Dollar, having come close to 1.40 last week. It remains questionable whether this is sterling strength or Dollar weakness. My view is Dollar weakness, which failed to be dented last week by the poor UK retail sales and inflation figure last week. Inflation was down slightly from last month at 3.0%, whilst Retail Sales for December were down 1.5%. On the more positive side, expectations are increasing that the EU will come to a more reasonable deal with the UK, providing support for the pound.
For this week, the markets will be will be watching the unemployment figures on Wednesday with unemployment expected to remain at 4.3%. We then have UK GDP figures released on Friday and expected to show an increase of 0.4% on the previous quarter.
GBPEUR – 1.1330
GBPUSD – 1.3885
This week is all about the ECB meeting and the following press conference. Last week saw further strength in the Euro following the release of the minutes from the last ECB meeting of last year. Expectations of further tapering abound and this will be the key question facing Mario Draghi at the press conference on Thursday. Concerns remain around the strength of the Euro which may give the ECB more cause to err on the dovish side for this month. Further positive news in the political sphere as there appears to be some movement towards forming a coalition in a Germany which will remove months of political deadlock.
Ahead of the rate decision and press conference on Thursday, we have a number of indicators that will give further insight into the economic health of Europe with ZEW economic sentiment from Germany and EU consumer confidence on Tuesday.
EURUSD – 1.2255
EURGBP – 0.8826
The government shutdown is the major news affecting the US and is an unfortunate way for Donald Trump to end his first year as president. The market has not reacted strongly to this last turn of events. Despite strong US economic growth, higher interest rates and fiscal stimulus, the US dollar has been the worst performing G10 currency since Trump became president. Latest IMF data show that central bank Dollar reserves held is the lowest has been for over three years. There has been talk of China and Japan stepping away from US Treasury purchases which could explain the increase in US treasury yields alongside a weaker US Dollar.
This week eyes will be focused on whether a short term deal can be agreed to restart government spending, whilst on Friday we will see fourth quarter GDP which is expected to hold around 3%.
GBPUSD – 1.3885
EURUSD – 1.2255
