G10 currencies in holding pattern as interest rates march higher

US inflation data came out higher than expected last week, supporting the dollar against most other currencies.

Critically, there are signs that the recent easing trend, on which so many hopes are deposited, is petering out and that inflation is stabilising at unacceptably high levels. Rates rose worldwide, with markets repricing their expectations for central bank easing and beginning to accept that it will likely not come until 2024. We note, in particular, that the expected terminal rate for both the Fed and the ECB hit new highs last week. The dollar failed to benefit substantially, and most G10 currencies traded in a narrow range, save the yen. The Japanese currency was weighed down by the appointment of a relatively unknown academic as the new head of the Bank of Japan.

Attention in markets this week remains on macroeconomic indicators. The PMIs of business activity are released worldwide on Tuesday, and we will be paying particularly close attention to continued improvement in the Eurozone. US PCE inflation, the Fed’s preferred measure, comes out on Friday. It will be a light week in terms of central bank communications, save for the minutes of the February Fed meeting released on Wednesday.


The inflation surprise in the US was not massive, but it was enough to stop the downward trend we have been highlighting in core inflation, the most reliable indicator of future inflation. Core inflation indices seem to be stabilising north of 4%, wages have finally caught up, and it seems that quite a bit of work remains to be done by monetary policy in order to bring inflation back towards Fed targets.


Bank of Canada governor Macklem continued to strike a hawkish tone during his communications last week. He noted that an overheating economy was continuing to put upward pressure on prices, while failing to rule out the possibility of additional hikes, despite seemingly closing the door to further tightening at each of the past two BoC meetings. This is the type of unclear and muddled communications that market participants despise, so it will be interesting to see whether this is reflected in a weaker CAD in the coming weeks.

Tuesday’s inflation report will be the main focal point of trading in Canada this week. We suspect that a fairly significant upside surprise will be required in both the headline and, in particular, core inflation print in order to bring another rate hike from the BoC into view.


After a quiet week in euro trading, we think that this week’s business activity PMIs have the potential to provide upside risk for the common currency. Consensus is pricing in a very modest increase further into expansionary territory, but this may underestimate the optimistic newsflow coming out of the Eurozone economy on multiple fronts recently, particularly the fading threat of an energy crisis. Of course, this positive surprise would only pile on the pressure for the European Central Bank to make up for lost time in hiking rates, so we remain generally positive on the euro.

This week actually looks set to be a rather eventful one in the Euro Area, with a handful of additional economic data releases likely to be closely scrutinised by market participants. Aside from Tuesday’s PMI prints, the January inflation report (Thursday) may be key in guiding expectations for ECB monetary policy and the euro.


We had a rare positive surprise on the inflation front out of the UK last week. The data on services inflation was particularly encouraging. This is the first sign that UK core inflation may be following the same path as in the US, albeit with a lag, and will now start a gradual downward trend, having peaked in the Autumn of 2022. This is likely to ease pressure on the Bank of England to continue raising interest rates in the coming months, and indeed markets now only see 50bps of additional tightening from the MPC through to the middle of the year.

Last week’s inflation report adds to the general positive turn in UK data, in particular from the labour market. Retail sales also surprised positively. All in all, we agree that pessimism around the UK economy is exaggerated, and maintain a positive view on sterling.

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