Dollar Declines, Focus on U.S., Canadian, and Eurozone Rate Decisions
GBP
GBP/USD is currently trading at 1.2502 (interbank), while GBP/EUR stands at 1.1888 (interbank).
The Pound has found support following better-than-expected preliminary UK S&P Global/CIPS PMI data for January. Economists had forecast marginal growth at 50.0, but the data came in at 50.9, driven by strength across both services and manufacturing sectors.
A slowdown in labour demand appears to be linked to Chancellor Rachel Reeves’ announcement of higher National Insurance (NI) contributions for employers. Businesses are cutting jobs amid concerns over falling sales and the challenging economic outlook.
Despite these concerns, recent soft UK data has strengthened expectations of a 25-basis point (bps) interest rate cut by the Bank of England at its February meeting, with markets almost fully pricing in a reduction to 4.5%. The week ahead is light on UK data, but investors will monitor Governor Bailey’s speech on Wednesday for further policy signals.
No significant events are scheduled for today.
EUR
EUR/USD has risen and is currently trading at 1.0515 (interbank), near a 6-week high.
ECB President Christine Lagarde, speaking at Davos last week, stressed the need for Europe to prepare for potential changes in US trade policy under President Trump. Lagarde also expressed confidence that eurozone inflation remains on track to return to its 2% target this year.
German IFO Business Climate Index data for January surprised on the upside, rising to 85.1 from 84.7, against expectations of a decline to 84.6. The Current Economic Assessment Index also improved, climbing to 86.1, though the Expectations Index fell slightly to 84.2.
Attention this week turns to Thursday’s ECB meeting, where a 25 bps cut to the deposit rate, bringing it to 2.75%, is widely anticipated. Markets will also be watching preliminary CPI data from Germany, France, and Spain, as well as eurozone GDP figures for Q4 2024.
Today’s events (GMT):
09:00 - German Ifo Business Climate Index (Jan) – Actual vs Forecast: 84.9
15:35 - ECB President Lagarde Speaks
USD
The Dollar Index, which tracks the US dollar against six major currencies, is down to 107.099, near a 6-week low.
The dollar weakened last week, experiencing its worst performance since November 2023, as President Donald Trump scaled back his rhetoric on trade tariffs. This led to reduced risk premiums for key trading partners’ currencies.
Markets are focused on Wednesday’s Federal Reserve policy decision, with no changes expected to the current rate of 4.25%-4.5%, according to the CME FedWatch Tool. Inflation rose to 2.9%, its highest since July, while core inflation eased to 3.2%. Despite resilient labour markets and strong economic growth, the Fed is expected to hold back on additional rate cuts.
Trump has urged the Federal Reserve to lower interest rates, but Fed Chair Jerome Powell has reiterated the central bank's independence from political influence. Additional data this week includes durable goods orders, preliminary GDP figures, and the PCE index.
No significant events are scheduled for today
CAD
USD/CAD remains steady at 1.4465 (interbank) after reaching a fresh four-year high of 1.4473 yesterday.
The potential for tariffs on Canadian exports to the US continues to weigh on the Canadian dollar. Tomorrow’s Canadian inflation data will be in focus, with December CPI expected to decline by 0.5% month-on-month, down from November’s flat reading. Annual inflation is forecast to ease to 1.7% from 1.9%.
The Bank of Canada appears to prioritise economic growth, aiming to keep inflation within its target range of 1-3%. At its previous meeting, the BoC cut rates by 50 basis points to 3.25% but noted that further cuts would be evaluated on a case-by-case basis. Markets still largely expect another rate cut at the 29 January meeting, though some analysts predict the central bank may hold rates steady.
Oil prices are firm this morning, supported by optimism over tighter supply amid stricter US sanctions on Russia. Brent crude is trading at $80.63 a barrel, while West Texas Intermediate crude (WTI) is at $77.56 a barrel.
Today’s events (GMT):
15:30 - BoC Business Outlook Survey
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