Last week’s Federal Reserve hike of 25 basis-points and Bank of England and European Central Bank hikes of 50 basis-points, were in line with expectations. It wasn’t so much what the central banks did, as what they said, that was important. The Federal Reserve restated that it felt further tightening would prove necessary given the strength of the labour market. The Bank of England removed ‘forcefully’ from its language around further monetary policy action, and the European Central Bank expects to hike again in March by a further 50 basis-points, unless there was a materially negative shift in the data. All of these decisions though were superseded by a much larger-than-expected US non-farm payrolls print for January. Payrolls rose a net 517,000, against expectations of a gain of just over 180,000. With the unemployment rate falling to a 53-year low, it was hardly a surprise that yields rose, and the dollar bounced.

For this week, there are far fewer important data or surveys to hold the market’s attention, but there are some notable releases. Much of the interest in the early part of this week will be on Euroland, with German industrial production for December, and German consumer price inflation data for January. The German industrial production figures are expected to record a sharp drop, in line with the recent run of negative factory orders. German CPI (Consumer Price Index) figures are expected to record a rise in January after a run of lower outturns. This could reinforce the sentiment that the ECB (European Central Bank) will continue to hike interest rates well into the second quarter. After that, attention will switch to the UK, with GDP (Gross Domestic Product) data for December and Q4 to be released, coupled with December industrial production, index of services and construction output figures. Those figures are likely to fortify market sentiment that the UK economic outlook is set to deteriorate, helping to weaken expectations of additional interest rate hikes. As for the US, a round of secondary data releases aren’t likely to alter sentiment towards the US, much, if at all.

Last week saw the US dollar recover from some of its recent losses against the likes of the GBP and EUR. The key drivers for the moves were the central bank meetings, but for the US dollar it was Friday's non-farm payrolls and unemployment figures in the driving seat. It prompted a revision of interest rate expectations in the US, and a pullback in some of the recent improvement in risk sentiment. Last week saw GBPUSD finish just above $1.2050 and GBPEUR just above €1.1150. For GBPEUR these are levels not seen since the end of Q3 2022, whereas for GBPUSD it is only a few weeks since the last time these levels traded. 

With this week seeing little important data from the US due, the focus may be on events elsewhere. What will the UK GDP figures look like, and can the Euroland industrial sector hold up in December after weakness in November? The risks for the key FX markets are for more USD strength, and for the GBP to lose additional ground to the EUR as well, in my opinion. Perhaps a visit below $1.20 in GBPUSD will prompt a move back towards $1.18, and as for GBPEUR, any moves lower will perhaps target €1.1040, at least initially.   

This week’s central bank meetings include the RBA (Reserve Bank of Australia), the RBoI (Reserve Bank of India), the Riksbank (Sweden) and Banxico (Mexico). All of these central banks are expected to hike interest rates, but by how much? The RBA and RBoI should hike by 25 basis points to 3.35% and 6.5% respectively, but there is a risk of signals of more tightening to come from the RBA, and a possibility of a slightly larger hike from the RBoI. With a slightly less negative economic environment, the Riksbank could surprise with a 50 basis-point hike, whilst the markets only expect a 25 basis-point tightening, and Banxico should hike by 25 basis-points. For the FX markets, these decisions, with the exception of the Riksbank, are broadly priced in, and the risks of additional US interest rate hikes undermine any lasting positive effects for the respective currencies against the US dollar, in my view.