A new dawn for America
Sterling moves higher
Sterling moved higher last week and could continue to strengthen as the UK rolls out its mass vaccination plan. However, negative interest rates and lower growth have also been a topic at the Bank of England and have the potential to put pressure on the British currency in the future. UK inflation data this week could influence the Pound, with expectations for a slight increase on December's reading. Meanwhile, data looking at the manufacturing sector is expected to stumble lower but still show growth. Services data is likely to tumble into contractionary territory given the third UK national lockdown is in full swing.
Softening as risk sentiments ebbs
The Euro softened towards the close of last week as risk sentiment faltered and the US Dollar, a safe-haven asset, climbed. Vaccine delays, an extended Italian lockdown, and the potential for tougher restrictions in Germany are all factors weighing on the common currency and could create further movement, especially if Italian politics flare up once again. In the week ahead, the European Central Bank will make its latest monetary policy statement and hold a follow-up press conference which could be significant for the Euro. Additionally, German and French manufacturing and services data could also create common currency movement.
The US Dollar has been climbing in recent sessions, rising more than 0.6% last week against a basket of other majors. The move came as risk appetite ebbed and as markets turned their focus to the upcoming inauguration (which still has the potential for disruption by hard-core Trump supporters). With Joe Biden being sworn in as the 46th President, he faces a number of issues to deal with, such as vaccinations which are in high demand and short supply. However, markets will likely expect more fiscal support under Biden's rule, which could give US Dollar sentiment another reason to be buoyant. With the US observing Martin Luther King Jr day today, movement may be muted. In the week ahead, one of the most important data points will likely be the US manufacturing figure which is expected to show a slight fall in January in comparison to December.
AUD and NZD
Waiting for the Treasury Secretary
Since October versus the Australian Dollar, the Pound has fallen by around 4.5% but has rebounded by approximately 1.5% since the beginning of January. Meanwhile, Sterling has fallen by about 3.6% against the New Zealand Dollar since October, but has bounced back by 2.4% since January. The Trans-Tasman currencies have appreciated due to improved global market sentiment in light of the coronavirus vaccine that should help return things to normality and allow economies to recover. Additionally, China—Australia and New Zealand's largest trading partner—should note a rebound in economic growth, which could bode well for the Australian and New Zealand economies. The Pound's rebound has been attributed to post-Brexit deal appreciation.
For both the Aussie, Kiwi, and Canadian Dollar, former Federal Reserve Chief and incoming Treasury Secretary Janet Yellen's speech could be a risk event as she's expected to comment on exchange rate policy. Yellen's likely to say that the US will not intervene to soften the Dollar to gain a competitive advantage. Additionally, in the week ahead, Australian consumer confidence and labour market data will be released, as well as New Zealand inflation data.
A surge in Canadian coronavirus cases could weigh on the Loonie as the nation experiences its strictest restrictions since March with a stay-at-home order in place. The nation's unemployment rate has been climbing, and other areas of the economy have stumbled, meaning the Bank of Canada may need to reconsider its monetary policy stance in its January 20th meeting. Canadian inflation data and the Bank of Canada's interest rate decision could be the most significant events in the week ahead. Still, retail sales and house price stats will also reach the market.