U.S. Dollar Hits Two-Year High Post Rate Cut; BoE Rate Decision in Focus
GBP
GBP/USD is currently trading at 1.2663, having briefly dipped to 1.2568 (interbank), while GBP/EUR stands at 1.2147 (interbank).
The Pound remains steady following the release of the UK’s Consumer Price Index (CPI) for November, which showed annual inflation at 2.6%, up from 2.3% in October and in line with market expectations. Core CPI rose to 3.5% year-on-year, slightly below the forecast of 3.6%.
Attention now shifts to today’s Bank of England (BoE) interest rate decision, where policymakers are widely expected to hold rates at 4.75%. Markets will closely monitor the voting splits among the nine Monetary Policy Committee (MPC) members, as any dissenting votes could provide insights into the direction of future policy changes.
In an interview earlier this week, Governor Andrew Bailey suggested the BoE could deliver up to four rate cuts over the next year if inflation continues its downward trend. However, Bailey emphasised a cautious and gradual approach to easing. The BoE’s accompanying Monetary Policy Report will also offer further insights into the Bank’s economic outlook.
Today’s events (GMT):
12:00 - Rate Decision (Dec) – Remain at 4.75%
EUR
EUR/USD has declined and is now trading at 1.0415 (interbank), after briefly touching a low of 1.0364 yesterday.
Today, German Consumer Sentiment Index, improved more than anticipated for January, climbing to -21.3 points from a marginally revised -23.1 points in the previous month.
Yesterday’s Eurozone inflation data revealed a modest rise, marking the second consecutive monthly increase. However, inflation remains close to the European Central Bank’s (ECB) target of 2%, easing pressure on policymakers.
German inflation remained above the Eurozone average, while the European Central Bank continues to signal further rate cuts.
Investors anticipate reductions at every policy meeting until mid-2025, as concerns about economic risks weigh heavily on the Euro.
Today’s events (GMT):
07:00 - GfK German Consumer Climate (Jan) – Actual: -21.3 vs Forecast: -22.6
USD
The Dollar Index, which gauges the U.S. dollar against a basket of six major currencies, has rallied and is currently at 107.93 after reaching 108.26 yesterday, the highest point since November 2022.
The Federal Reserve delivered a widely expected 25-basis-point rate cut yesterday, bringing the target range to 4.25%-4.50%. Fed Chair Jerome Powell indicated that further reductions would depend on continued progress in lowering inflation. His cautious tone triggered a mixed market reaction, with equities falling, bond yields rising, and the Dollar strengthening.
Additionally, Fed officials projected two further rate cuts in 2026 and another in 2027. Over the longer term, the committee estimates the “neutral” rate at 3%, marginally higher than the September forecast, reflecting a gradual upward adjustment throughout the year.
Later today, investors will turn their attention to key U.S. economic data, including GDP figures, initial jobless claims, and the Philadelphia Fed Manufacturing Index, for further insights into the economy’s trajectory.
Today’s events (GMT):
13:30 - GDP (Q3) – Forecast 2.8%
13:30 - Initial Jobless Claims– Forecast 229K
13:30 - Philadelphia Fed Manufacturing Index (Dec) – Forecast: 2.9
CAD
USD/CAD has climbed to 1.4394 (interbank), following a high of 1.4467 yesterday, the pair's strongest level since March 2020.
The Canadian Dollar remains under pressure, impacted by domestic political uncertainty and a growing yield gap with the U.S., following data showing a surprise easing in Canadian inflation. The Bank of Canada (BoC) has signalled a slower pace of rate cuts in 2025, but the Federal Reserve’s own dovish outlook may extend the disparity between the two economies.
Prime Minister Justin Trudeau is facing mounting political challenges, including calls for his resignation after the departure of Deputy Prime Minister Chrystia Freeland. Additionally, Donald Trump’s remarks about Canada potentially becoming the 51st U.S. state have added to the political drama.
Oil prices have softened, with Brent crude trading at $73.37 a barrel and West Texas Intermediate (WTI) at $70.31 a barrel.
No significant events are scheduled for today.
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