GBP: The British pound has reached new multi-month highs, but if inflation data surprises higher or lower and the Bank of England adopts a cautious stance on Thursday, the coming week might see a decline. In fact, the pound hit its highest level since August 2022 and April 2022, respectively, against the euro and the dollar. In that regard, the British Pound has benefited from rising short-term UK bond yields, which indicate expectations for additional BoE rate hikes due to the UK’s “sticky inflation”. The CPI inflation report, which is due on Wednesday, poses the greatest risk to the pound right now. In the end, a miss to the negative might cause the Bank of England’s rate hike expectations to deflate, which would cause GBP strength to unwind.

EUR: While the Euro has recovered versus the US Dollar, it has continued to weaken against the British Pound due to differences in ECB and BoE policies. Nevertheless, the hawkish hike by the European Central Bank, oversold circumstances, and a wave of unimpressive economic data may help the Euro try to make up some of the recent losses against its peers. In fact, the ECB is not in the mood to pause just yet, supporting the single currency of the bloc, as seen by President Christine Lagarde’s comments last week that the central bank still has room to cover. The eurozone Economic Surprise Index also shows that recent macroeconomic data for the Euro region have disappointed. The series appears to be mean reverting, though, which suggests that there is little room for further adverse surprise in the bloc. In the end, the single currency may be supported by macro data that are better than anticipated.

USD: With a speech by Fed Chair Jerome Powell hanging large this morning, the U.S. Dollar stabilised in light holiday-affected trading this morning as traders assessed the effects of last week’s central bank actions. In fact, the performance of the U.S. Dollar Index is sideways as a result of market players’ conflicting opinions about the Fed’s policy rate guidance. Despite providing hawkish guidance last week, Fed head Jerome Powell allowed interest rates to stay unchanged while stating that two modest rate increases would be acceptable. However, according to market participants polled by the CME Fed-watch tool, the Fed may only announce one rate hike this year given the US economic outlook and declining consumer inflation expectations. Additionally, the state of the US labour market has deteriorated significantly as a result of pressure from US regional banks and rising interest rates on businesses.

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