Sterling edges higher despite political pressure on British PM

Important Calendar Events

• EUR: Spanish Unemployment Change, EU CPI Flash Estimate and Core CPI Flash Estimate, Italian Preliminary CPI 
• USD: ADP Non-Farm Employment Change, Crude Oil Inventories
• Oil: OPEC-JMMC Meetings

USD

The dollar softened on Tuesday, after rising last week in the wake of the Federal Reserve’s announcements. The Fed showed signs of moving towards a more aggressive tightening of its monetary policy and pointed towards raising its benchmark interest rate as early as March. The dollar was buoyed by the Fed’s announcements, but this week started adjusting to lower levels, with the dollar index ranging between 96.71 and 96.24. 

ADP Non-Farm Employment Change and US Crude Oil Inventories are scheduled to be released on Wednesday. Unemployment data are especially important as may help determine the frequency and aggressiveness of Fed rate hikes this year.

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EUR 

The Euro has been under pressure over the past weeks by rising geopolitical tensions between Russia and Ukraine. As a peaceful resolution to the conflict has not been found yet, the EU is considering economic and trade sanctions against Russia in the event of an invasion against Ukraine. Such measures however threaten to increase inflation in the Eurozone as well, which relies on Russia for the import of key commodities. Already the price of wheat is rising, and a disruption in the distribution of oil and natural gas might trigger an energy crisis in the EU. 

In the past week, the Euro weakened against the dollar, as the Fed showed clear intentions of tightening its monetary policy and raising its benchmark interest rate. This week, the BOE is also expected to move towards a more hawkish monetary policy and announce another rate hike. The ECB on the other hand seems set to follow a dovish policy, which puts the Euro at a disadvantage. Many investors expect the ECB to shift its monetary policy within the year and yield to inflation pressures in the Eurozone. Even though the EU Central Bank is not expected to change its interest rates, traders will scan the ECB’s statements at its next meeting on Thursday for signs that the Central Bank might start moving towards a more hawkish direction. 

A number of economic and inflation indicators were released on Tuesday for the Euro, and were mostly positive for the Eurozone economy as a whole. The Euro gained strength on Tuesday against a weakening dollar, with the EUR/USD rate climbing to 1.128.  If the currency pair goes up, it may find resistance at 1.138 and further up at 1.148, while support may be found around 1.118, and further at 1.063. 

Several indicators are scheduled to be released on Tuesday for the Eurozone, including Spanish Unemployment Change, EU CPI Flash Estimate and Core CPI Flash Estimate, Italian Preliminary CPI. These are economic, inflation and employment indicators for major EU countries and for the Eurozone as a whole. The release of this data might cause some fluctuation for the Euro ahead of the ECB meeting on Thursday. 

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GBP 

Sterling climbed on Tuesday, despite political instability threatening to end Boris Johnson’s premiership. Civil Servant Sue Grey presented a preliminary report of her findings into the so-called ‘party gate’ scandal on Monday. The report is as yet unfinished and heavily censored, pending the conclusion of the Metropolitan Police investigation into the matter, but it contains heavy criticism against the actions of the British PM, finding ‘failures in leadership’. Following the release of the report, Boris Johnson addressed the House of Commons in a tumultuous session, in which he issued an apology for the incidents, but was hammered by former Prime Minister Theresa May. 

The heavy political climate is putting pressure on the sterling, which is propped up by rising anticipation that the Bank of England will signal a rate hike at its next meeting on February 3rd. As inflation in the UK has reached record highs over the past months, the BOE is expected to follow in the Fed’s footsteps and announce an increase in its benchmark interest rate in an attempt to drive inflation down. Heavy volatility is expected on Thursday for the sterling, following the UK Central Bank’s rate announcement and the ensuing speech by BOE Governor Andrew Bailey. Many investors expect that the BOE, which has already increased interest rates in December from 0.1% to 0.25%, will continue its hawkish monetary policy and will raise interest rates by another 25 base points, to a total of 0.5%. 

The sterling edged higher on Tuesday with GBP/USD climbing above 1.35, as the dollar weakened. If the GBP/USD rate continues its ascend, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.332 and further down at 1.317. 

On Tuesday, several financial and inflation data are scheduled to be released for the UK, such as: Final Manufacturing PMI, Mortgage Approvals, Net Lending to Individuals. These provide indications over the state of the British economy and might cause volatility for the currency if it is considered they might influence the BOE’s decisions in its meeting later this week.

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JPY 

Financial indicators released on Tuesday for Japan were mostly positive, giving the Yen a slight boost. The Yen however remains at its lowest levels in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households.  The BOJ is set in its ultra-accommodating monetary policy, which aims to boost the economy. The disparity in interest rates between the BOJ and other major Central Banks, though, is hurting the currency. 

The Japanese vice finance minister for international affairs, Masato Kanda, stated that the weak Yen has its advantages, such as highly competitive exported goods, but recognises the downsides of a weak currency, which might point to a change in fiscal policy in the future.

The Yen gained strength against a softer dollar, with the USD/JPY rate declining and testing its 114.8 support. If the pair continues declining, further support might be found at 112.55, while if it gains strength, it may find resistance at 115.6 and 116. 

A number of economic, employment and inflation indicators are scheduled to be released on Tuesday for Japan, such as the 10-year Bond Auction, Unemployment Rate, Final Manufacturing PMI. Although these provide indications for the state of the economy in Japan, they are not likely to cause high volatility for the Yen, as the Bank of Japan seems set on its fiscal policy.

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Written by:
Myrsini Giannouli

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