The US dollar continued its upward trajectory from the previous week, driven by robust economic data and hawkish statements from Federal Reserve (Fed) policymakers. Reaching its highest point in nearly three months against major currencies, the surge in Treasury yields fueled expectations that the Fed would adopt a less aggressive approach to interest rate cuts this year.

Simultaneously, the Australian dollar gained ground as the Reserve Bank expressed openness to another rate hike. Globally, investors are reducing their expectations for rate cuts throughout the year. Fed Chair Powell is closely monitoring the labor market's performance, emphasizing robust job growth sustaining wage increases and exerting upward pressure on service prices.

Powell reaffirmed the Fed's more hawkish outlook for 2024, anticipating three 25 basis point cuts this year. Fed funds futures now indicate around 115 basis points of easing for 2024, down from approximately 150 at the year's end. Supported by strong US data, the economic surprise index is at its highest level in about three months.

Following the impactful US jobs report that shook markets and boosted the dollar and bond yields, Monday's data revealed the US service sector's significant expansion in January. This growth, attributed to increased orders and employment, resulted in a three-month high of 55 in the gauge of new orders placed with service providers—a proxy for future demand.

The Senior Loan Officers' Survey, released yesterday, indicated a gradual tightening of loan supply by banks, albeit at a slower pace. With no significant US data scheduled for today, a moderate round of profit-taking on the dollar may occur, considering its recent surge.

Due to a hawkish reassessment of Bank of England (BoE) rate expectations, supported by strong UK inflation and PMI figures surpassing expectations, GBP had a generally positive start to the year, gaining ground against nearly 80% of 50 global currencies. The positive momentum continued into February, making GBP the best performing G10 currency year-to-date, until a substantial US jobs report last Friday disrupted markets and led to a sharp decline in GBP/USD.

As anticipated, the BoE maintained unchanged interest rates last week but abandoned its tightening bias, signalling a potential shift towards rate cuts. While the market initially showed limited reaction, a turbulent Friday following the US jobs report saw the pound plummet by nearly two cents, dropping from around GBP/USD 1.28 to approximately GBP/USD 1.26.  This marked the worst week for GBP/USD since early December. With expectations of US-UK yields converging, the likelihood of reaching a new high in 2024 in the short term seems slim. There is even a possibility of a downward breakout towards the 50-week moving average, positioned closer to GBP/USD 1.25.

The absence of significant data this week implies that geopolitical developments and sentiment are likely to steer trends in the foreign exchange market. Consequently, USD exhibited strength this morning, especially following the US-initiated retaliatory airstrikes in the Middle East over the weekend.  While monitoring global events, attention will also be directed toward certain domestic occurrences. The British Retail Consortium's retail sales report on Tuesday, a set of housing data on Wednesday, and various BoE officials speaking throughout the week will be noteworthy. Additionally, caution is warranted regarding the GBP's positioning risk, as speculative bets on GBP appreciation are currently stretched well beyond their long-term average. Any unwinding of these positions could hasten the decline in GBP cross rates.

GBP is experiencing a decline against a strengthening USD, driven by the release of U.S. job and wage data surpassing expectations. The robust U.S. economic performance, with the creation of an impressive 353K jobs in January, far exceeding the anticipated 180K, has eliminated the likelihood of a Federal Reserve rate cut in March.

The positive momentum for the USD is further fuelled by the upward revision of the previous month's job creation to 333K. Additionally, average hourly earnings, reflecting a 4.5% year-on-year increase in January, outpaced the consensus for a decrease to 4.1%, following an upward revision from 4.4%. This combination of strong employment numbers and higher wages has contributed to the current depreciation of GBP/USD.

These figures ridicule the expectations of a market that had priced in a Federal Reserve rate cut as soon as March, shifting the likelihood of the initial cut to at least mid-year. In light of such robust economic indicators, one might question the necessity for the Fed to implement any rate cut at all.

The current exchange rates show GBP/USD down by two-thirds of a percent at 1.2664, while the EUR/USD exchange rate has decreased by 0.68% to 1.0798.

Following a lackluster performance in January, the euro staged a recovery, registering substantial gains against the US dollar, propelled by renewed risk-on sentiment as the Friday session unfolded. The EUR/USD saw early gains on Thursday, fueled by a mixed Eurozone inflation report and a significant contraction in 2-year German-US yield spreads, diminishing the dollar's yield advantage over the euro.

In conjunction with German and French inflation figures, the flash estimate on Thursday revealed a dip in the Eurozone HICP index from 2.9% to 2.8% in January. Core inflation also declined from 3.4% in December to 3.3%. However, caution is warranted before declaring victory in the inflation battle. The European Central Bank (ECB) closely monitors the evolution of core inflation, which is cooling at a slower rate than anticipated, despite reaching its lowest level since March 2022. Risks persistently lean towards the upside, as higher wage agreements could translate into increased selling prices. Both PMI and the European Commission's economic sentiment surveys indicate rising selling price expectations.

Despite the decline in core inflation, the ECB finds some reassurance in the historically tight labor market, with unemployment at 6.4%. This situation allows the ECB to maintain policy rates at current levels until convinced that inflation is truly moving towards the desired 2% target.

With no significant domestic events on the end-of-week calendar, EUR/USD is vulnerable to the impact of the US Non-Farm Payrolls (NFP) report scheduled for later in the day. Federal Reserve Chair Powell's statement on Wednesday emphasized that only sustained weakness in the labor market would prompt the Federal Open Market Committee (FOMC) to consider earlier rate cuts, underscoring the significance of NFP and future job data releases. Consequently, if the US January payrolls signal a softer job market, EUR/USD may rally further to catch up with recent spread tightening.

Despite a more hawkish than expected Bank of England, EUR/GBP experienced minimal changes on the day but is poised to conclude lower for the sixth consecutive week. On the other hand, EUR/CAD slid to a fresh 15-week low, as Canada reported its strongest Purchasing Managers' Index (PMI) readings in the past three months.