Last year, the US economy exceeded expectations and thwarted predictions of a looming recession. The recent release of the Q4 GDP figures confirmed a robust growth rate of 3.3% for the annualized 3-month period ending in December, surpassing economists' forecasts of 2%. This announcement concludes a year marked by positive surprises, showcasing the US's outperformance compared to the global economy.

The report had a "honeymoon" quality, with the stronger growth not being accompanied by a resurgence of inflation. The Q4 PCE price index rose by 1.7%, a decrease from the 2.6% recorded in Q3. Equities responded positively to this news throughout the week, approaching their record highs. The US dollar is poised for its fourth consecutive week of appreciation, notably strengthening against the euro, Australian dollar, Canadian dollar, and Swedish krona.

In the realm of fixed income, it is anticipated that 2- and 10-year US Treasury yields will decline this week due to expectations of lower inflation rates. However, the 30-year yield has surged approximately 33 basis points in January alone, reaching 4.350%. Despite the substantial amount of new debt issuance from the US government this year, the potential economic moderation and decreasing inflation rates may continue exerting downward pressure on yields. Investors are closely monitoring the upcoming US PCE release.

Forecasts indicate a decline in core inflation from 3.2% in November to 3% in December. This would position the Fed's preferred inflation gauge at its lowest rate since early 2021, affirming the continuation of a disinflationary trend at the close of last year. While market expectations suggest six rate cuts from the US central bank in 2024, there is uncertainty regarding the timing. Market sentiment fluctuates between the March and May meetings, with the probability of a March cut currently standing at precisely 50%.

The EUR successfully defended crucial levels against the USD and GBP, following a reaffirmation by the European Central Bank that it has no intentions of raising interest rates until the summer. EUR/USD maintained interim support at 1.0870, while EUR/GBP held steadfast at 0.85 for a second consecutive day, coinciding with the decision to keep all ECB lending rates unchanged.

The real source of intrigue for the foreign exchange markets was expected to be the ECB's statement, but it turned out to be a source of disappointment, as the central bank essentially replicated December's statement. The underlying message suggests that the ECB is adamantly resisting market expectations for a rate cut in the first half of 2024.

During last week's Davos conference, ECB Christine Lagarde asserted that the central bank would only contemplate rate cuts in the summer, and January's uneventful policy meeting seems to confirm this stance.

While market-implied pricing for ECB rate cuts remains unaltered, indicating no perceived 'hawkish' undertones in the unchanged policy decision, the ECB maintains its position of assessing incoming pay settlements before making any moves on interest rates. Consequently, it appears that several more months will pass before the central bank shifts its stance and signals an impending interest rate cut.

The January policy update was anticipated to be a placeholder event, with new economic projections expected to be unveiled by the central bank in March.

The focal point for today will be around the European Central Bank's (ECB) January policy decision, with expectations that policymakers will stress the absence of imminent interest rate cuts. However, Westpac suggests the possibility of a cut before midyear due to weak regional data. While the ECB governing council seems inclined to signal a pause and a likelihood of no easing before mid-year, their stance remains contingent on data trends. Ongoing soft data could sustain the potential for an earlier or more pronounced easing trajectory.

Despite the eurozone economy grappling with widespread stagnation and inflation risks leaning towards the upside, arguments are aligning for the ECB to refrain from cutting rates before summer, consistent with President Lagarde's guidance last week. Escalating price pressures underscore the significance of reviewing first-quarter wage agreements' data before any policy rate adjustments. Anticipated today is the central bank maintaining a hawkish rhetoric, resisting current market expectations of a 64% probability of an April rate cut and cumulative 128 basis points rate cuts by year-end.

In the early European trading session, EUR/USD experienced a 0.7% surge, reaching a one-week high of $1.0932 following subjectively positive headline flash Eurozone PMIs. However, the pair struggled to sustain levels above the $1.09 threshold and retraced part of the early gains as US composite flash PMIs hit a 7-month high. The future vulnerability of EUR/USD hinges on President Lagarde's performance during the press conference following the rate decision later today, especially if her stance deviates from a convincingly hawkish tone.

The British Pound (GBP) strengthened against the EUR, USD, and other major currencies following reports of robust growth in the UK economy in January. According to the S&P Global PMI survey, the dominant services sector expanded with a reading of 53.8, surpassing December's 53.4 and exceeding the expected 53.2.

Although the manufacturing PMI remained at 47.3, indicating contraction, it was an improvement from December's 46.2 and above the consensus expectation of 46.7. The composite PMI, offering a more comprehensive view of the economy, registered at 52.5, up from December's 52.1 and surpassing the consensus of 52.2. The Pound to Euro exchange rate reached its highest level in four months at 1.1715, propelled by these better-than-expected figures. Eurozone PMI readings, falling short of expectations and indicative of economic contraction, further supported the Pound's strength. GBP/EUR exchange rate was quoted at 1.2755, a half-percent increase.

The data suggests that the UK economy is solidly in expansionary territory, potentially reducing the need for the Bank of England to implement interest rate cuts. The likelihood of higher UK rates for an extended period supports UK yields and boosts demand for the Pound. S&P Global noted that service sector activity saw its fastest rise since May, despite a decrease in manufacturing production, attributed to the disruptions in the Red Sea. The survey cautions against a premature policy shift by the Bank of England, especially considering reports of increased freight costs.

Concerningly, the survey reveals that private sector firms experienced the sharpest rise in input costs since August 2023. This, coupled with improving demand conditions and higher optimism toward the business outlook, is expected to keep domestic inflationary pressures robust. Resilient demand is anticipated to bolster employment, wages, and inflation. January data indicates a modest increase in private sector employment, ending a four-month period of job shedding. The rise in staffing levels is linked to a rebound in service sector recruitment driven by new project starts and anticipated demand growth. UK businesses exhibit a more positive outlook for growth in the next 12 months, with confidence levels at their highest since May 2023.