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As we enter the final week of January, the markets are positioning themselves ahead of the interest rate decisions that will be released over the following 10 days. Last week, Sterling sustained its 5-year highs against the Euro which, combined with a hawkish Bank of England policy, could break even higher over the coming weeks. Over the course of January, the GBP/EUR rate has rose 1.36%. This is primarily due to the lack of restrictions implemented in the UK in comparison to the rest of Europe. Furthermore, the ECB remain bearish on their monetary policy whilst the BoE look set to raise rates again after record-high inflation data was released last week at 5.4% – the highest since 1992. It must be noted that Sterling took a hit last Friday after pool retail sales data came out, but many analysts believe this has not deterred investors in the Pound ahead of the interest rate decision next Thursday. Otherwise, this week’s economic calendar is quiet for the UK and the highlight will be Sue Gray’s report which will outline her findings regarding the alleged lockdown-breaking parties at No. 10.
Although Euro fell against Sterling and Dollar last week, the mood seems to be more positive from the European Central Bank. The Federal Reserve and the Bank of England are both positioning themselves to raise interest rates imminently off the back of record high inflation figures. However, ECB President Christine Lagarde believes that inflation will subside without the need for rate hikes, as high energy prices and supply issues are putting pressure on industrial growth already. This reduces the need for hawking monetary policies and therefore might support the Euro long term. That being said, the short-term outlook for the Euro is not so positive. Investors in the market will be supporting USD and GBP as both look to raise their interest rates which is generally seen as positive for a currency. We have Market PMI Manufacturing and Services data out this morning which usually gives a good idea of how businesses are performing across the continent. However, interest rate decisions will take the headlines over the coming 10 days.
Early dollar gains were trimmed last Thursday after the recent upward trajectory of US Treasury yields paused. Another factor for the drop in gains was an unexpected jump in weekly applications for unemployment insurance. The number of Americans filing new claims for unemployment benefits hit a three-month high last week. Initial claims for state unemployment benefits increased 55,000 to a seasonally adjusted 286,000 for the week ended 14th January, the largest rise since July. And despite a global equity sell off in the US last week the dollar was supported by increased safe-haven demand. As well as this, the Fed is set to conclude its two-day meeting on Wednesday, and although there aren’t any expectations to move rates. There has been rising expectations for the central bank to bring forward its tightening plans tame persistently high inflation. Goldman Sachs said last week that it forecasts for four rate hikes this year as many eyes will be on Wednesday’s interest rate decision to see which way it goes. This could cause a lot of volatility around the rate depending on whether there is a rate hike or a rate cut.
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