January 16, 2025

“The US posted some softer-than-expected inflation data yesterday, but the dollar has largely remained firm going into Trump’s inauguration on Monday. Growth data disappointed once again in the UK, and that’s weighing on sterling this morning.”

Sam Cornford – Head of Trading

USD

Some relief on core inflation in December weakened the dollar only marginally yesterday. Headline CPI landed at 2.9% as expected, driven by an uptick in energy prices, but the first sub-0.3% monthly core inflation print in five months finally gave markets some encouragement that the underlying trend is still broadly pointing downwards. Another 6bps in easing has since been priced in for the Fed this year and Treasury yields have pulled back slightly. But the dollar has repeatedly been able to outperform moves in the rate differential so far this year, and an initial drop was largely wiped out later in the day. The yen managed a rally, though, having jumped 1% as BoJ Governor Ueda’s confidence on wage growth and inflation flipped the market’s call to a hike at next week’s meeting.

The main event today is Scott Bessent’s Senate grilling regarding his nomination as Treasury Secretary. In preprepared remarks, he is set to lay out his plans to create a ‘new economic golden age’, to make the 2017 tax cuts permanent, and to keep the dollar as the world’s reserve currency. Any hints towards concrete policy moves after Monday’s inauguration will have the potential to move the dollar, particularly on the topics of tariffs, the fiscal deficit, and taxes. We also get some retail sales and unemployment claims data this afternoon.

GBP

Sterling is underperforming this morning after data showed that UK growth disappointed again in November. The 0.1% growth is an improvement on two months of contraction, but it underperformed the 0.2% expectation and points to a soft overall performance in Q4. The concerning loss in momentum can largely be pinned down to a crisis in confidence related to the new government’s first fiscal event in October, where we saw a lot of gloomy rhetoric in the lead-up and a poorly received decision to tax businesses to fund investment spending. The recent vulnerability of the gilt market to the global rise in yields is a headwind to investment too. Remember that the UK grew the quickest in the G7 in the first half of 2024. Yet, in the five months for which we have data from the second half, only two saw positive growth.

EUR

The euro was beholden to the dollar’s direction yesterday and, despite a brief lift to a one-week high after the US CPI report, it closed out modestly lower as it continues to struggle capitalising on movements in the yield differential. There are a couple of domestic events today, including the release of the December meeting minutes this afternoon, followed by a speech from perennial ECB dove Panetta, who is likely to mirror Villeroy’s and Guindos’ confidence in disinflation and further rate cuts.

Markets

Stocks rose strongly yesterday as US inflation cooled and the big US banks reported strong earnings. CEOs from Goldman Sachs, JP Morgan, and Citi were all highly confident in the new US administration being good for the business environment, and Bank of America and Morgan Stanley report today. The S&P 500 surged nearly 2% and the major European indexes rose around 1%.

Main Economic Events (All Times CET)

8:00am: UK November GDP
2:30pm: US Retail Sales & Jobless Claims

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