What’s been happening?

Pound Sterling – UK Markets 

The UK’s Office for National Statistics on Wednesday reported that the headline Consumer Price Index in January edged down to 1.8% annually from 2.1% recorded in December and fell short of the market expectation of 1.9%. The core CPI, which excludes volatile food and energy prices, matched December’s reading of 1.9% as expected. Other details of the report revealed that the Retail Price Index (RPI) declined by 0.9% on a monthly basis in January and the Producer Price Index (PPI) - output -  edged down to 2.1% on a yearly basis from 2.4%. “The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago,” the ONS explained.

With soft inflation figures seen as a factor that could allow the Bank of England to hold off on further rate hikes, the British pound came under a renewed selling pressure. However, heightened hopes of a delay in Brexit helped the currency quickly recover its losses. The European Commission in a statement said that it has not received a request for a Brexit extension, and added: “An extension of Brexit deadline would normally not be open-ended.” Nevertheless, the broad-based USD strength in the second half of the day caused the pound sterling to close the day lower vs the dollar. Against the euro, the currency was able to post modest gains as the shared currency struggled to find demand amid disappointing macroeconomic data from the euro area.

US Dollar – US Markets

The 10-year Treasury Bond yield gained more than 1% for the third straight day on Wednesday and helped the greenback gather strength following yesterday’s technical slide. The US Dollar Index erased all of Tuesday’s losses and advanced to its highest level since mid-December above 97. 

According to the monthly report published by the U.S. Bureau of Labor Statistics, the monthly CPI stayed unchanged for the second month in a row in January and brought the annual rate down to 1.6% from 1.9%. The core CPI in the same period rose 0.2% and 2.2% on a monthly and yearly basis, respectively. Later in the day, the U.S. Treasury Department announced that the federal government ran a budget deficit of $14 billion in December as tax cuts continued to weigh on the revenue.

Later in the day, Atlanta Fed President Raphael Bostic stated that he was expecting only one rate hike in 2019 and argued that the Fed didn’t need to rush to get to neutral. “It’s important that we don’t go too fast and inadvertently restrict the economy,” Bostic added.

Euro – European Markets

The euro failed to build on Tuesday’s gains and suffered losses against both the dollar and the pound sterling. Wednesday’s data from the euro area, once again, confirmed the economic slowdown and weighed on the shared currency. The Eurostat’s monthly report showed that the industrial production in December contracted by 0.9% on a monthly basis and brought the annual growth rate down to -4.2% from -3% announced in November. “In the euro area in December 2018, compared with November 2018, production of both capital goods and nondurable consumer goods fell by 1.5% and energy by 0.4%, while production of intermediate goods remained unchanged and durable consumer goods rose by 0.7%,” the Eurostat explained in its press release. 

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK. Dr Gertjan Vlieghe, the member of the Bank of England's Monetary Policy Committee, is scheduled to deliver a speech.

US: Weekly initial jobless claims, retail sales, business inventories, and Producer Price Index (PPI) data will be featured in the U.S. economic docket. 

EU: Real GDP growth data from both Germany and the eurozone will be released on Thursday. Markets expect Germany economy to expand by 0.1% on a quarterly basis in Q4.