The start of the new year has brought a more optimistic outlook, as economic data improves, China reopens, inflation appears to be peaking, and central banks are expected to end their rate hike cycle. The focus is shifting away from concerns of a recession.
Starting state-side, US Inflation dropped to 6.5%, potentially indicating that the Federal Reserve may slow their tightening efforts in the coming months. Following the release of the inflation figures, US equity markets heavily rebounded and markedly impacting the value of the dollar.
Closer to home, growth figures in the UK were slightly better than expected, with crucial inflation and employment numbers set to be released next week, which could influence the size of the rate increase expected by the Bank of England on February 2nd. The market is divided on whether this increase will be 0.50% or a more moderate 0.25%. The projected peak for rates has dropped to around 4.40% in June, though a recent split in voting suggests the next meetings will be noteworthy.
The Eurozone economy continues to show signs of recovery, driven by lower gas prices and milder weather, though another 0.50% rate hike is likely next month as policymakers remain cautious about persistent high inflation.
GBP/USD has seen some ongoing demand below the psychological level of 1.2000 but is capped at the significant 1.2500 barrier. GBP/EUR is under pressure at its 3-month lows as the EUR strengthens across the board due to the improving economic outlook.