GBP

The Pound continued to make headway yesterday as better than expected inflation data and speculation that the Bank of England would take a less dovish (low interest rates) stance provided support. Also, vaccine rollout optimism and global risk appetite continued to reinforce support. The Euro fell to below 1.1300, 8 month lows, and Sterling re-tested the 1.3700 mark against the Dollar but failure helped trigger a significant correction.

Bank of England Governor, Andrew Bailey, opined that economic fallout would not be severe as after the 1980’s recession and noted that inflation was still very low and there’s uncertainty over what people will do with increased savings. Finally, he added  that no decision had been made on negative interest rates. The Pound consolidated near 1.3650 on the Dollar and the Euro recovered to 1.1273. 

Global risk appetite remains strong and Sterling tests the 1.3700 mark again this morning and the Euro again weakening to near 1.1300.

USD

The US NAHB housing index retreated to 83 for January from 86 the previous month and compared with expectations of an unchanged reading. Higher yields and fresh coronavirus restrictions may have had an impact, although confidence remained very high in historic terms.

US equity futures held gains into yesterday's New York open amid positive risk appetite. Wall Street equities posted fresh record highs amid expectations of further strong fiscal support and a very accommodative Federal Reserve (Fed) policy. Although equities moved higher, there was no increase in bond yields which curbed potential dollar support.

There was relief that President Biden’s inauguration passed with no significant incident. As expected, Biden issued a series of executive orders to reverse many of Trump’s policies with the mandating of mask wearing in federal buildings.

EUR

The Euro’s rally against the Dollar has stalled over the last two weeks, with the potential for the pair to suffer deeper losses if the ECB expresses displeasure over the single currency's strength at Policy meeting. 

Currently, the currency pair is trading near 1.2125, having pulled back from multi-month highs around the 1.2350 earlier this month. The central bank is widely expected to keep the interest rate and the asset purchase program unchanged, having partly boosted the level of policy accommodation until early 2022 in December. However, the possibility of the central bank jawboning the currency cannot be ruled out.

Data to watch

07:45 - EUR - Monetary Policy Statement

07:45 - EUR - Main Refinancing Rate

08:30 - EUR - ECB Press Conference

08:30 - USD - Philly Fed Manufacturing Index

08:30 - USD - Unemployment Claims