February 09, 2024

“A dearth of activity across some of our major pairs has been made up by a hive of activity in the central European and Asia-Pacific currencies towards the end of the week. This will not last for long, though, and we are gearing up for some big moves next week when key inflation figures in the US and UK give further clues on the rate cutting cycle.”

Tim Hallinan – Trading Director

Main Headlines

Donald Trump won Republican presidential nominating caucuses in Nevada and the US Virgin Islands on Thursday, moving closer to becoming his party’s White House standard-bearer in a likely general election rematch with US President Joe Biden in November. Trump, the frontrunner in his party’s nominating race, was the only major candidate competing in Nevada’s caucuses and was set to win the state’s 26 delegates to the party’s nominating convention in July after being projected the winner on Thursday night by Edison Research.

Britain’s biggest retailer, Tesco, said on Friday it would sell most of its banking operations to lender Barclays for up to 700 million pounds ($883 million). The supermarket group said the majority of the proceeds would be returned to shareholders through an additional share buyback. The deal will see Tesco sell its existing banking operations in credit cards, loans and savings, removing 7.7 billion pounds of capital-intensive assets and 6.7 billion pounds of financial liabilities from its balance sheet.

GBP

Sterling continues to hold in a tight range as markets prepare for when the headline data starts rolling in next week. In contrast to Swati Dhingra who called for a cut last week, known hawk Catherine Mann from the Bank of England expressed concern yesterday that red sea hostilities and the loosening in financial conditions – spurred on by rate cut bets – posed significant risks to the British inflationary outlook. Underpinning her expectations that the UK would be well behind the US and Eurozone in easing policy were rising real incomes, a positive growth outlook, and persistent tightness in the labour market. Sterling will likely remain at current levels barring any surprise in the US CPI revisions, with the focus firmly on the labour market, growth, and inflation data next week.

EUR

There have been few domestic impulses for price action from the eurozone recently, but there has been a lot of activity on the crosses over the past few days. German final CPI this morning printed with no change from the original estimate at 0.2% month-on-month, after it ticked up from the December figure. EUR/PLN moved sharply downwards yesterday after Governor Glapinski at the National Bank of Poland all but ruled out any further rate cuts this year, citing ‘very high uncertainty’ despite inflation likely to hit 2.5% by the end of Q1. The Czech koruna moved in the opposite direction, weakening by 1% to an almost two-year low after the central bank cut by a more-than-expected 50bps and forecasts showed a weaker economy and lower rates.

USD

The dollar index is close to notching a fourth successive weekly gain, as investors wait to see if seasonal adjustments weaken the late-year disinflation story. An economic downturn could prompt policymakers to loosen interest rates earlier, according to the Fed’s Barkin, but few expect this to be a material driver of the policy path given the stubbornness of US economic growth. The annual seasonal adjustments to last year’s month-on-month CPI inflation has the biggest potential to move the market today, after downwards revisions to the figures in late 2022 wiped out much of the progress against inflation. With Bank of Japan officials pouring cold water on expectations for a more sustained hiking cycle, indications that policy tightening would be gradual spurred a sharp USD/JPY rally to a 10-week high yesterday.

Markets

In the US, the S&P 500 is set for a fifth weekly gain despite finding hard resistance at the 5000 level, boosted by a robust US economy and strong earnings. Dovish comments from Bank of Japan propelled the Nikkei over 2% yesterday, while European and British indices drifted.

Main Economic Events (All Times CET)

8:00am: German Final CPI
10:00am: Italian Industrial Production
11:30am: ECB’s Nagel speaks
2:30pm: Canadian Employment Change

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