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Currency Market Update - 18th January 2024

Currency Market Update Stronger than expected U.S Retail Sales in December has helped to keep the US Dollar elevated near a 5-week high against the major currency pairs, with Interest Rate cut expectations dropping with The Federal Reserve seemingly in no exact rush to lower their rates.

Markets have now trimmed the odds of a first rate cut by The Federal Reserve in March, from 65% to 61%. Up until yesterday, economic data releases from across the pond were pretty much a mixed bag, but with yesterday’s robust Retail Sale, it does bring into doubt for when that first rate cut will take place.

The next 2 weeks will be crucial for The US Dollar, and anyone exposed to USD purchases, with their inflation figures set to be released next Friday, and the Federal Reserve’s Interest Rate decision the following Wednesday, on the 31st. Another strong release with Inflation next week would no doubt see that 61% probability of a cut drop even lower and therefore strengthen the US Dollar against major currencies even more. Of course the opposite could also happen, but it certainly looks like most Central Banks are fighting back against market expectations with Interest Rates.

Turning our focus towards today, the main events are both from Europe, with Christine Legarde’s speech being the main feature. As many would have noticed, GBP/EUR has been fairly stagnant for a while and this proved the case yesterday. GBP had minimal gains against the EUR yesterday after the UK’s inflation release, and this was mainly due to Christine Legarde stating that Interest Rate Cuts in Europe are more likely to come in the summer months rather than in the spring. Again running with the current theme of Central Bank’s holding off from market speculation and wanting to wait until later this year, another factor for the reluctance to cut imminently is due to the fact that any aggressive rate cuts would more than likely have a detrimental effect to inflation, almost seen as counter-productive.

We finish the week off tomorrow with December Retail Sales for The UK, with forecasts suggesting a potential 1% increase against December 2022. As ever, these are only forecasts and actual releases can be very different, but an improvement in Retail Sales on top of the Inflation release earlier this week could throw any potential rate cuts into further doubt for The Bank of England.

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