Sterling retains a slight edge over the euro, both fundamentally and technically, as the Bank of England’s tendency is toward communicating a less dovish message than the European Central Bank, and some pockets of eurozone data remain weaker than the UK. This week, the UK takes the limelight with all eyes on Governor Andrew Bailey’s testimony to the Treasury Select Committee on Wednesday along with Friday’s GDP release.
In the UK, the pre-Christmas fall in headline inflation to 3.9% perhaps caused an overreaction in market expectations towards rate cuts. Bailey, testifying this week, may push back on this slightly, as inflation is still twice the target and reaching 2% may take longer than expected. Some economists think 2% will be reached by April, but Bailey will likely warn of the risk that this may not happen. The big market reaction, therefore, will be if Bailey ‘does a Powell’ and communicates a very dovish message. This could easily drag sterling down by 150 pips across the board, were it to occur. Later in the week, a more positive GDP print is expected after the miss seen in December, although this is unlikely to cause much sterling volatility unless a big miss is seen.
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