GBP

Sterling fell nearly a cent overnight against the dollar, when hawkish remarks by Federal Reserve Bank head Jerome Powell triggered a rally in the greenback and sent the pound to its lowest level this year. Against the euro, sterling was largely unchanged. At Prime Minister’s question time yesterday, Boris Johnson rejected opposition calls to resign for attending lockdown parties but accepted that a rule that ministers should lose their jobs if they had knowingly misled parliament applied to him. Also before parliament, Johnson accused the European Union of implementing part of the Brexit agreement covering trade with Northern Ireland in an “insane way”, complaining that he never thought the Northern Ireland protocol he negotiated as part of the Brexit deal would be so disruptive and needed to be sorted out. The comments risk souring negotiations with Brussels as Foreign Secretary Liz Truss continues talks with her EU counterpart.

EUR

The euro followed the same fate as sterling following last night’s Federal Reserve Bank meeting, falling 0.75% against the dollar, its lowest in 2 months. With the greenback continuing to outperform its rivals this morning as markets increase their expectations of a 50 bps hike at the Feds March meeting, the single currency remains on the back foot. The GfK consumer confidence index released this morning showed consumer morale improving in January as households hope for possible easing of the Covid situation in the spring. However, the improvement was modest with consumer inclination to save on the rise. Italy’s political parties will hold a fourth round of voting on Thursday to elect a new head of state, but with the parties still blocked over a mutually acceptable candidate it appeared likely to be inconclusive.

USD

Although the federal Reserve Bank left policies unchanged at last night’s meeting, while responding to questions from the press Chairman Jerome Powell noted that there was “quite a bit of room” to raise rates without hurting the Labour Market. Powell further added that inflation has gotten worse since the December meeting and reaffirmed that the committee was in favour of hiking the policy rate in March “assuming that the conditions are appropriate for doing so”. Those comments sparked a rally in US treasury bond yields, which had closed in negative territory in the previous 5 days and created a demand for the dollar. Reflecting the positive impact of Powell’s comments, the dollar index, which measures the greenback against a basket of major currencies, rose 0.5% to trade at its highest level this year. This afternoon the Gross Domestic Product growth for the last quarter of 2021 will be released.

Economic Calendar

13:30pm US GDP (Q4)
13:30pm US initial jobless claims
13:30pm US durable goods orders (Dec)