ACM Update 26-01-26
The US Dollar suffered losses last week, as threats of new US tariffs on the EU and Canada created nerves once more. Despite President Trump seemingly backing down post his Davos speech, the underlying uncertainty remained.
UK data showed inflation bounced back up to 3.4% in December, whilst Government borrowing fell in the same month.
This week brings the first interest rate announcement of the year from the Federal Reserve. US rates are highly likely to remain on hold, but future policy moves are less certain.
The World Economic Forum in Davos was the focal point for financial markets last week. With economists, central bank heads and world leaders all in attendance, the event drove much of the market movement.
Donald Trump’s speech on Wednesday lunchtime was the biggest event of those in the Swiss mountains. His mammoth 70-minute speech saw plenty of threats which destabilised currency markets initially, despite a retreat on many of the remarks later in the week. Geopolitics also calmed slightly, as the President ruled out using force to obtain his desired Greenland.
Financial markets once gain came back to the TACO (Trump Always Chickens Out) mentality of last year, where Trump made threats, only to retreat on them further down the line. The threatened tariffs on NATO allies of Greenland and Denmark, were also rescinded as a “framework” deal was reached for the future. That said, there were no details behind the deal. The topic remains in the limelight.
The unpredictable nature of US policymaking from The White House, was also a factor in Dollar weakness in the second half of the week. Following the Davos speech, speculation mounted once more that Trump would replace Fed Chairman Jerome Powell with a more dovish policymaker, more to his own taste. This would further undermine Fed independence, denting confidence.
The above led to markets revising their interest rate expectations from the Fed in 2026. The US are now expected to cut more significantly than other major economies this year. There may be clues on that from this week’s meeting, published on Wednesday evening.
With policy and politics remaining muddy at best in the US, investors moved to other safe haven assets such as gold, which saw a record high. Speculation that the US may well intervene in helping support the Japanese Yen, also led to Dollar weakness.
Overall, it was the worst week in a while for the Dollar, as it slipped to four-month lows versus the Pound and Euro. Movements on GBP-USD last week can be seen in the chart below:
GBP on the other hand saw a range of data releases which allowed it to hold ground against other major currencies. This led to a sixth week in a row of closing up against the Euro, albeit gaining less than 0.2% last week.
The stability for the Pound can be largely attributed to data releases pointing to less expectation of short-term rate cuts from the Bank of England. Unemployment data on Tuesday was perhaps the outlier to this positivity though, with the headline jobless reading remaining at a recent high of 5.1%. Payrolled employee numbers continued to fall, down 135,000 in the three months to November, primarily on the high street.
The simultaneous wage growth release also pointed towards a slowing in the reading in the latter half of last year. This eased slightly to 4.7%, creating hope that softening wage growth may allow interest rate cuts at the Bank of England soon, but further drops in the data will be required.
However, other data seemed to suggest rates may need to/can remain as they are. The December inflation reading saw the first increase in the metric since June’s data, in nudging back up to 3.4%. The main drivers behind the move up were an increase in the cost of air fares and tobacco.
There were further buoyant data releases too. Thursday’s government borrowing numbers saw a slight narrowing of public sector debt in December. The deficit for the month was £11.6bn thanks to better tax receipts, which was 38% down on the previous December.
Positivity for the UK economy also came from better-than-expected retail sales figures on Friday morning. The December numbers showed an increase of 0.4% on the previous month, beating expectations of no change. This in turn was 2.5% up on the same month in 2024 and was largely attributed to better sales online, from jewellers in particular.
The uptick in UK performance was completed by the December PMI figures. The Services sector recorded 54.3 which was a 21-month high, whilst the manufacturing sector saw a 17-month high itself.
The outlook for the UK economy is perhaps looking slightly brighter then. This sentiment was reaffirmed on Friday morning by a speech from MPC rate setter Megan Greene. She stated that the economy is still highly impacted by the choices of other central banks, especially the Federal Reserve. Faster US rate cuts, she believes, may in fact slightly increase UK inflation pressure, leading to a slower pace of UK rate cuts.
As is often the case, what is bad for the Dollar is good for the Euro, which indeed proved to be the case last week. The four-month high on EUR-USD topped out at just shy of 1.19 in early trading this morning. There were a number of factors driving this, other than just the weaker Dollar.
Economic sentiment data out of Germany saw a sharp rise to 59.6 this month, its highest level in over four years and also well above market forecasts. A resurgent German economy would be great news for the Eurozone overall, hence the positivity.
The minutes from the most recent ECB meeting in December were also unveiled last week. These continued to show that policymakers are in no rush to change interest rates, given inflation is on target. Rates are likely to be held throughout 2026, a divergence from expected US activity.
Consumer confidence was also up in Europe in January. This too supports the view of a resilient economy across most member states, albeit with slow growth rates generally.
Both Christine Lagarde & Joachim Nagel were in attendance and speaking at the WEF in Davos. The pair both expressed concern at the threatened US tariffs, as well as being comfortable with the position of EU interest rates. The ECB President also reportedly walked out of a dinner at Davos, after the US Commerce Secretary gave a speech critical of European economic and energy policies.
All in all, a slight increase for GBP versus the Euro during the week. As mentioned, now up for six weeks in a row. Movements on the pair can be seen below:
The week ahead:
Monday – ECB Nagel speeches (10:00 & 13:30), US Durable Goods Orders (13:30)
Tuesday – US CB Consumer Confidence (15:00), BoJ meeting minutes (23:50)
Wednesday – Aus CPI inflation (00:30), BoC rate announcement (14:45), US rate announcement (19:00) & Press Conference (19:30)
Thursday – US Unemployment Claims (13:30),
Friday – German CPI (07:00) & GDP (09:00), UK Mortgage Approvals (09:30), EU Flash GDP & Unemployment rate (10:00), US PPI inflation (13:30),
After the events of last week, we move on to the beginning of the latest round of interest rate announcements. Both the Bank of Canada and Federal Reserve make their policy decisions on Wednesday, with the latter release taking place at 19:00 UK time. This is then followed by the usual Jerome Powell press conference 30 minutes later.
Give the high chance of rates being held, one can expect a focus on the press conference. The Powell-Trump head to head is likely to continue here, but an update to the Fed’s dot plot of future rate cut expectations, will also be key.
UK events for the week are minimal, thus we can expect Dollar-related news to remain the main driver. That and any further developments geopolitically. It is also worth noting the potential for US intervention to support the Japanese Yen, as a possible factor.
European events are primarily on Friday this week, with inflation and GDP numbers from Germany, Spain and other major players. Any degree of positivity from these may well help drive the Euro and remove even a remote chance of a rate cut the following week.
Given the multiple per cent movements of last week, we can expect plenty of market movement to carry on into this. Do reach out to the Aston team to protect any requirements you have, as we move towards month end.
Have a great week.
