Market odds for a rate cut by the ECB in April rose from 60% to 95% following yesterday’s ECB meeting, resulting in a broad EUR sell-off. Markets latched onto the data dependency narrative, recent data showing poor growth and lowering inflation backs the call for an earlier rate cut. Lagarde commented that risks to economic growth and inflation remains on the downside, but the Bank is wary of upside risks to inflation amidst heightened geopolitical tensions and upcoming wage negotiations. GBPEUR climbed to the highest since August 2023.
USD gained traction as well, with Q4 GDP numbers coming in higher at 3.3% versus an expected 2%. GBPUSD remained in its tight range but could well test the bottom end of the range in coming sessions. The combination of the ECB meeting and the GDP numbers dragged EURUSD back down to 1-month lows, and crucially through the 200-day moving average again. Should we see the rate stay below here in coming sessions then the pair seems likely to test the lows seen on 8th December.
* Daily move - against G10 rates at 7:30am, 26.01.24
** Indicative rates - interbank rates at 7:30am, 26.01.24
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The USD is set to finish higher for the fourth consecutive week, with all eyes on the December print for the core PCE inflation numbers. The number should all but confirm that the Fed's job is done, and thus we see any upside surprises in the number as something that will move markets more.
Markets have started the day in a risk-off tone, with Asian equities sliding and US futures all pointing to a lower start - spooked by Intel’s earnings report last night, this environment should benefit safe-haven flows into USD as well.
Focus on our desks is the continued weakness on the EUR, and with clients taking advantage of the move and electing to hedge the gains particularly on GBPEUR. GBPEUR upside seems likely to be capped to the highs of 2023, which is roughly 0.3% higher than current levels. EURUSD however could have further downsides, especially if USD demand continues to pick up.
This month marks the 25th anniversary for the euro. Today the euro is the world’s second reserve currency behind the dollar, used by almost 250 million Europeans in 20 countries. Overall, the inception of the euro has been deemed a success, creating stability in the area from a time of wild fluctuations in individual currencies. Over this period, we’ve seen GBPEUR trade as high as 1.75, and almost as low as parity at the height of the great financial crisis.
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