27 January 2025

GBP

Last Tuesday, the number of new claimants in December 2024 rose by only 700, compared to the forecast of over 10,000. This positive surprise indicated a stronger-than-anticipated labour market in the UK. However, employment levels still decreased for a fourth consecutive month, with businesses blaming rising cost pressures. These cost pressures will mount in April when taxes on employment are raised and minimum wage increases lift wage demands across the board.

The latest Purchase Manager’s Index data was released last Friday, the UK manufacturing PMI improved to 48.2 from 47.0 in December, indicating a less negative outlook. Services PMI came out at 51.2, greater than the forecast of 50.8. This supported GBP strength, with GBP/USD around 1.25 and GBP/EUR reaching 1.18 by the end of Friday.

Markets are increasingly expecting the Bank of England to cut the base interest rate by 50 basis points when the Monetary Policy Committee meets next week. Alan Taylor, a new Committee member, suggested that the central bank should cut rates “pre-emptively”, fuelling speculation of a larger-than-expected rate cut and predictions of six rate cuts or 150 points of cuts by the end of the year. Goldman Sachs has also been reported to believe that the BoE might take a more assertive approach despite ongoing inflationary pressures and slowing growth.

This week, the Governor of the Bank of England, Andrew Bailey, is scheduled to speak before the Treasury Select Committee at 2:15pm on Wednesday. Market participants will closely watch his comments for any insights ahead of next week's meeting.

EUR

Last Wednesday at the World Economic Forum in Davos, European Central Bank President Christine Lagarde highlighted that disinflation was progressing as expected, reinforcing the ECB's commitment to its current monetary policy stance and gradually lowering interest rates this year. She also addressed the need for Europe to be prepared for potential trade tariffs from the newly inaugurated Trump, emphasising the importance of negotiation and mutual respect in trans-Atlantic trade relations.

The latest Purchase Manager’s Index data was released on Friday and had a mixed impact on the EUR. In Germany, Manufacturing PMI increased to 44.1, and services PMI rose to 52.5, and in France, Manufacturing PMI improved to 45.3, while services PMI declined to 48.9, leading to some weakness in EUR.

On Thursday at 1:15pm, the European Central Bank will announce its latest interest rate decision. It is anticipated that the ECB will cut the interest rates by 25 basis points, reducing the key rate from 3.15% to 2.9%.

USD

Last week, Donald Trump’s inauguration into the White House on Monday and initial policy announcements saw some market reaction.

He announced plans to implement tariffs on imports from Mexico, Canada, and China, creating concerns about potential trade tensions and their impact on global trade, leading to market uncertainty and concerns about a renewed bout of inflation. Trump's emphasis on ‘America First’ economic policies, including promoting oil drilling and taxing foreign trade, added to the market's cautious sentiment.

Last week, the dollar clocked its weakest week since November 2023 as tariff fears ebbed, but the worries resurfaced as the US and Colombia pulled back from the brink of a trade war.

On Wednesday, Trump criticised the previous administration's handling of inflation and high interest rates and reiterated the call for immediate interest rate cuts by the Federal Reserve, putting this week’s monetary policy meeting into sharper focus. The Fed is expected to keep rates unchanged when it concludes a two-day meeting on Wednesday, though investors will be looking for any reaction to Trump’s comments.

This week, several key economic data releases are scheduled that could impact the markets. On Tuesday at 3pm, the US Consumer Confidence report will be released, and Thursday will see the release of the US Advance quarterly GDP data and Unemployment Claims at 1:30pm.

Finally, on Friday at 1:30pm, the US Core Personal Consumption Expenditures (PCE) Price Index month-on-month and the Employment Cost Index quarter-on-quarter will be published.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.