Currency Market Update January 9th 2025
The Pound
Its looking like a tough start to the year for the pound with the first round of data releases showing a greater slow-down in the manufacturing sector than expected with the services sector also losing momentum.
In what will be a further blow to the new Labour Government the British Chambers of Commerce also revealed over the weekend that confidence fell to its lowest level since former PM Liz Truss's “mini budget” in 2022 with businesses least happy about taxation. It is a further sign the UK economy is struggling following news last month that the economy contracted in October following a flat Q3.
Despite this, the Bank of England (BoE) decided to leave interest rates at 4.75% in December, which is a higher rate than both the US and Europe. Wage growth and services inflation still appear to be the sticking point leading to the BoE taking a cautious approach to further cuts. However, the decision proved contentious with a split in the committee with 3 of the 9 strong committee voting for a cut.
Following this latest round of news, a rate cut for the first meeting of 2025 scheduled for early February is being firmly priced in which is putting some pressure on the pound.
The US Dollar
In contrast, over in the US the Federal Reserve decided to push through a rate cut in December to get ahead of the game. There is much speculation around President Donald Trumps imminent second term in the White House with threats of tariffs creating inflationary risk.
Trump argues tariffs are a tool to boost domestic manufacturing and wield influence across foreign policy, while critics largely focus on the inflationary effects of tariffs, the cost of which many economists say are passed down to consumers.
Trump has already been quick to discredit a Washington Post article suggesting there were plans to pare back the tariff policy. The Fed are now expected to keep rates on hold at 4.5% for the foreseeable future meaning the pounds current yield advantage is likely to be short lived.
The Euro
The pound is not alone in declining against the Dollar over last few months. The Euro has also struggled falling 9 cents against the Dollar since October. The Eurozone has been more proactive in their rate cutting cycle with rates already below 3.25%.
Apart from the risks of inflation remaining persistently lower, weak economic activity and the likely impact of a trade war with the US on the Eurozone’s exports sector have also boosted the ECB's dovish bets.
Current expectations point to 4 more rate cuts for the Eurozone this year which would take the base rate towards 2% creating a bigger gap to the US. This suggests the US Dollar will maintain its advantage over the Euro for the medium term.
Key Economic news coming up
Friday 10th Jan
USD - Nonfarm Payrolls
CAD - Employment figures
Wednesday 15th
GBP & USD - Consumer Price Index figures
Thursday 16th
AUD - Employment figures
USD - Retail Sales
Friday 17th
GBP - Retail Sales
The PathFinder Team
0044 (0) 1743 290955
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