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To cut, or not to cut?

BoE in focus

The Pound garnered some support last week after economic data released on Friday was more positive than markets had expected. Both the UK manufacturing and services sectors noted an upswing. While the Services Purchasing Managers' Index jumped away from the 50.0 neutral level firmly into expansion territory at 52.9 in January, the Manufacturing PMI also made a substantial gain from 47.5 to 49.8, just hovering below the neutral level in contraction territory. Markets will be interested to see how these surveys translate when output is recorded in the coming weeks. This week, the market's focus will likely be on the Bank of England's interest rate decision on Thursday. Predictions for an interest rate cut have fluctuated from near-certain to no chance, meaning this week's meeting could cause some volatility in both the lead-up and the aftermath. Against a backdrop of slowing growth and softer inflation, it's thought a 25 basis point cut could help to support the economy; markets will be interested in any accompanying comments, and the divide in policymaker views, if there is one. In terms of economic data, UK Consumer Confidence and Mortgage Approvals stats will be out on Friday. 

ECB begins review 

The Euro was trading at multi-week lows at the end of last week after the European Central Bank struck a dovish tone on the topic of monetary policy, suggesting risks remain 'tilted to the downside'. Under the leadership of new ECB President, Christine Lagarde, the central bank has begun its first strategic review of monetary policy in 16 years. Lagarde said: 'We are going to review a whole host of issues. It will have to do with how we deliver, how we measure what tools we have, and how we communicate.' This morning, German Business Climate data has fallen from 96.3 to 95.9, completely missing forecasts for a rise to 97.1, but has been largely ignored by markets. There isn't a vast amount of influential Eurozone data out in the week ahead—although a flash inflation reading will be released on Friday—but there are some stats for individual member states such as German Retail Sales, Spanish Unemployment Rate, and French Flash GDP growth. 

Fed rate decision ahead

The US Dollar strengthened against safe-haven assets such as the Japanese Yen at the end of last week as market fears over the deadly Chinese Coronavirus eased following an announcement from the World Health Organisation. However, safe-haven demand rose once again overnight and the US Dollar has been trading lower versus the Yen as the Lunar New Year holiday has been extended by three days to 2nd February as China attempts to contain the virus. This week, the Federal Reserve will announce it's latest interest rate decision. Rates are largely expected to remain on hold, but markets will be looking for any changes in language to help predict any future policy direction. Other notable data this week will come in the form of Consumer Confidence, Durable Goods Orders, and Advance GDP growth. 

Fading rate cut expectations

The Australian Dollar rose towards the end of last week after economic data showed the Australian economy had added more jobs in December than forecasts had suggested. The Australian Dollar had also gained some support on easing expectations for an interest rate cut by the Reserve Bank of Australia in the immediate future. The New Zealand Dollar also climbed on fading rate cut expectations after data showed inflation in New Zealand had increased by more than economists had predicted in the final quarter of 2019. 

In the week ahead, the New Zealand data calendar is quiet, with only Trade Balance stats due in Thursday's Trans-Tasman session. Meanwhile,  the Australian economy will produce a few ecostats, including Business Confidence, and the highly influential Consumer Price Index detailing inflation levels for the fourth quarter. Markets currently anticipate a slight uptick from 0.5% to 0.6%, which could offer the Aussie exchange rate a little support. 

Tracking oil prices lower

The Canadian Dollar came under some pressure last week when the Bank of Canada opted to keep interest rates on hold, but suggested that if recent data disappointments persisted, there could be the chance of a further cut. By the end of last week, the Canadian Dollar had slipped to near a one-month low versus the US Dollar, tracking oil prices lower after Coronavirus fears spread. The price of oil, Canada's largest export, slipped by over 2.0% on Friday on concerns a further spread of the Coronavirus could create less oil demand as travel volumes decline. It's a quiet week for Canadian data; however, the highly influential Canadian Gross Domestic Product growth stat will be out on Friday, which could influence the Loonie exchange significantly.