Which central bank will be the first to cut rates?

Hello and happy new year from London! 🇬🇧

This week's picture takes us to the Ayia Napa natural arch in Cyprus.

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Here's a quick recap of the past year movement on the main pairs, weekly economic news and what to expect for the week ahead.

• EUR/USD saw a relatively calm year with a 2.44% increase over 2023. The pair opened at 1.0702 in 2023 and closed at 1.1037. However, with rates cuts expected from both the ECB and the Fed this year, as well as elections in the US and Europe, and conflicts ongoing in the Middle East and in Ukraine, 2024 could prove a lot more volatile.
• GBP/EUR followed a similar pattern with a 2.93% increase over the year. The pair opened at 1.1301 and closed 1.1535 in 2023.
• GBP/USD saw more volatility with a 5.28% increase over the year, bouncing back slightly from the year before. Cable opened at 1.2098 and closed at 1.2732 in 2023.

🇬🇧 GBP

The United Kingdom economy is sending mixed signals once again as it did throughout last year.

GDP grew by 0.3% in November, Manufacturing PMI came out in contraction at 46.2 in December, with services PMI in expansion at 53.4. The services industry has kept the British economy out of recession throughout last year, however manufacturing production increased by 0.4% in Dec, a better figure than anticipated. The British Retail Consortium retail sales figures showed a slower December month than expected with a 1.9% increase, against 2.3% anticipated.

This week we are awaiting unemployment rate figures, the UK retail sales figures, as well as inflation figures with a CPI expected to stay stable a 3.9%. This will be key to understand the Bank of England stance in the upcoming weeks, as the average mortgage rate in December reached 7.96%, putting more and more pressure on the construction industry and property owners.

🇪🇺 EUR

The situation in Europe is also quite contrasted with an average CPI of 2.9% in the Eurozone, not too far from their 2% target. The ECB could be the first to cut interest rates, especially as Germany's situation keeps sending worrying signals.

Manufacturing and services PMIs both remain in firm contraction in Germany, France, Italy, Spain and the wider Eurozone.

Germany is still facing a difficult situation despite a stable unemployment rate at 5.9%, but inflation remains at 3.7% YoY in December. Retail sales dropped by -2.5% in November with factory orders increasing by only 0.3%, a slower pace than expected. Industrial production also fell by -0.7% in November, with new figures this morning showing German output fell by -0.3%.

France saw the same inflation rate of 3.7% in December, however the finance minister announced they are targeting a 2.6% average inflation rate for the year, after 4.9% in 2023, and 5.2% in 2022.

This week we will be expecting the ZEW - Leibniz Centre for European Economic Research Economic Sentiment for both Germany and the Eurozone as well as the German PPI and the European Central Bank Monetary Policy Account.

🇺🇸 USD

The situation in the United States is also just as contrasting as in the UK and the EU.

Manufacturing PMI came out in contraction in December at 47.9, whiles services PMI came out at 51.4 in expansion. Non farm payrolls for December came out better than expected at 216k, with the unemployment rate dropping a bit to 3.7%, while the PPI came out lower than expected at a flat 0.0%.

This week we will be expecting retail sales figures from the US, as well as industrial production figures, the Fed's Beige Book, Initial Jobless Claims and the University of Michigan sentiment.

Another key event to watch this week is the situation in Yemen with the Houthis attacking ships on the Golf of Aden, endangering the passage through the Suez Canal as a result of the situation in Gaza. This already has forced many cargo ships to go around Africa, through the Cape of Good Hope, driving shipping prices, insurance, and oil prices on the rise. This hasn't reflected yet on the US dollar but may have serious impact if tensions escalate.

• EUR/USD remained stable last week with only a 0.07% increase. The pair opened at 1.0946 and closed 1.0949.
• GBP/USD followed a similar pattern with the rate going by 0.28%. The pair opened at 1.2721 and closed 1.2751.
• GBP/EUR also saw low volatility with a 0.19% increase. The pair opened at 1.1626 and closed at 1.1642 on Friday.

Get in touch

If you would like to have better management over your foreign exchange exposure, at GPS Capital Markets, LLC we can help with netting solutions, options, forward contracts and FX credit lines contact me at jdufour@gpsfx.com or call me on +44 (0)20 3146 1476 or book a meeting with me at this link: Book time with Julien Dufour: FX Risk & Treasury Management | GPS Capital Markets

Learn more about our cash flow hedging solutions with this video: GPS Capital Markets - Cash Flow Hedging Solution