The US dollar index rebounded yesterday, ending a two-day decline, fuelled by positive economic indicators from the US. Notably, it made significant gains against the Japanese yen, reaching 10-week highs as yield differentials widened. Concurrently, global equities, including the Nasdaq 100 and the S&P500, surged to new record highs. Today's focal point is the US Consumer Price Index (CPI) benchmark revisions, potentially introducing volatility ahead of the Lunar New Year holiday.
The continual influx of favourable economic data in the US reinforces the Federal Reserve's stance that interest rates will remain stable in the near future. A notable drop in new claims for unemployment benefits yesterday underscored the resilience of the US labour market, despite recent layoffs. Wage growth outpacing inflation is sustaining robust consumer spending. However, growth momentum is moderating, creating a disparity between strong official data and tepid business surveys. The Conference Board's leading index remains at levels historically associated with a recession.
USD strengthened against GBP, testing its 200-day moving average due to renewed demand for USD. Although the currency pair bounced off this critical level, it registered a daily decline, staying over 1% below its year-to-date high. GBP also faced losses against the EUR but held onto €1.17, while GBP/JPY advanced to 2-week highs.
Recent UK labour market data revealed an unemployment rate of 3.9% in the three months through November, lower than the previously estimated 4.2%. This tighter labour market may exert upward pressure on wages and prices, potentially influencing the Bank of England (BoE) to delay interest rate cuts. BoE policymaker Catherine Mann expressed concerns about the near-term deceleration in headline inflation, hinting at a close vote on raising interest rates last week. Flash UK inflation figures, alongside the jobs report and retail sales next week, could impact GBP. In the short term, the outlook for GBP appears less favourable due to seasonality and positioning. A retreat towards $1.25 cannot be ruled out next week, especially if UK inflation continues to decline, juxtaposed with the resilient US economy.
EUR held steady at $1.0770 against the US dollar, with no significant market-moving events on the calendar once again. This lack of notable developments defined the entire week. In the recent days, market expectations for ECB easing have notably receded, with the implied probability of an April rate cut hovering just slightly above a coin toss, at 51%.
