UK Inflation Report Boosts Pound

GBP : Inflation jumps to 3% reducing odds of early interest rate cuts

As GBP/EUR continues to trade above the €1.2000 handle and Cable (GBP/USD) maintains its position above $1.2600, the UK's January inflation data, which was issued this morning, offered the pound a minor boost. Due mostly to an unanticipated spike in food prices, the CPI increased to 3.0%, which was somewhat higher than the 2.8% consensus. Markets, however, are downplaying this. Although December's numbers were distorted by inaccurate Christmas airfare data, services inflation was 0.6% higher than last month and 5.0% lower than anticipated. Excluding volatile items, core services inflation improved steadily to 4.2% from 4.7% two months prior. The consensus of one rate cut per quarter this year is supported by the expectation that this trend will continue. 

As the Euro underperformed because of the EU's geopolitical isolation in comparison to the US, the GBP/EUR exchange rate is still performing strongly and reached €1.2050 this morning. A move of €1.2191 is feasible, but ING Bank anticipates at least 25 bps of dovish repricing in GBP, which should benefit the Euro in the long run. 

EUR : Euro fragile for many reasons 

Although it does not appear to reflect any actual shift in mood regarding growth, yesterday's increase in the German ZEW index was probably the result of increased investor optimism ahead of anticipation for a market-friendly change in administration. We are beginning to notice some indications of relative underperformance of European currencies, which we believe will be made worse by Trump's more transactional attitude to European NATO partners. The Euro is still tracking sentiment over the implications of the Russia-US talks. 

The EUR/USD continues to exhibit zero risk premium, or undervaluation, in accordance with ING Bank's short-term fair value model, indicating additional negative risks associated with a repricing of US protectionist risk into FX. Because of this, the decline can last till $1.0400 this week.

USD : Dollar recovering ahead of FOMC minutes

Although early trading today indicates strength in the Yen and Antipodean currencies, the dollar extended its recovery from yesterday. Markets will be keeping an eye on events in Ukraine, particularly any possible US-Russian collaboration that would isolate Europe and increase demand for the USD and JPY. Another factor was Trump's proposal to impose 25% tariffs on US imports. While the link between the S&P 500 and the Bloomberg Dollar Index has changed, US Treasury yields—with the 10-year at 4.55%—are helping the dollar rebound. The S&P 500 reached fresh highs, but that didn't stop the dollar's rise.

The FOMC's minutes from its January 29 meeting, which are the main event this week, are expected to underscore the emphasis on inflation and the need for a gradual rate drop. Risks continue to favor a stronger dollar in the foreseeable future, even though the short-term DXY value is currently fair. 

Today's Highlights

GBP : No Data 

EUR : No Data

USD : 19:00 FOMC Meeting Minutes.