The currency finished lower against almost all of its G-10 peers last week despite US core inflation beating estimates. Data showed U.S. Core CPI rose 1.8% y/y, surpassing estimates for a 1.7% gain. Off the back of the news treasury yields surged while Fed fund futures showed the odds of a March rate hike rose to more than 25%. On the retail sales numbers, headline sales were seen 0.4% up m/m, slightly shy of the 0.5% consensus, but with November’s reading pushed up to 0.9% from 0.8%. Stripping out autos however, which have been hurricane affected in recent months, sales were a touch firmer than expected at +0.4% (consensus +0.3%) and with a sizeable upgrade to November from +1.0% to +1.3%. Overall, the figures did look to be USD positive, given the more solid core inflation and core retail sales figures but this hasn’t fed through.

EUR/USD was up over 1.4% on Friday breaking above 1.22 as news German Chancellor Angela Merkel had reached a preliminary agreement for a coalition government filtered into the market. Both the Chancellor and the Social Democrats’ (SPD) leader Martin Schulz recommended on Friday morning that they should move on to “formal” coalition negotiations. The SPD is scheduled to hold a party conference on 21 January where delegates will vote on whether to move talks to the next stage. GBP was a major benefactor of the USD weakness and was further buoyed by reports coming out of the EU regarding Brexit. GBPUSD broke through a key resistance of 1.3657 (post referundum high) as German officials raised the prospect of a more flexible approach, while Spanish and Dutch finance ministers are also said to have agreed to support a Brexit deal that keeps Britain as close to the EU as possible. GBP/USD finished the day on 1.3728 from 1.3538, its highest level since June 2016. Nigel Farage also popped up again, suggesting the possibility of a second referendum last week. Any further progress towards the Brexit deal will see GBP continue its push higher and look to target the next key resistance of 1.3836.

The day ahead

It is likely to be a quiet start to the week as US markets will be closed for the Martin L. King Day holiday. For that reason, there will no US economic releases. Closer to home we have the Eurozone trade balance released at 10:00am. This is expected to come out at 22.3 bn, up from 19.0 bn in December. Finally, BOE member Tenreyro will be delivering a speech titled “The Fall in Productivity Growth: Causes and Implications” at Queen Mary University of London. Any hawkish comments are likely to reinforces GBP’s bullish position against the USD. 

Thought of the day

On this day in 2009, a US Airways Flight made an emergency landing in the Hudson River shortly after take-off from LaGuardia Airport in New York. Thankfully all passengers and crew members survived and the incident soon became known as the “Miracle on the Hudson” after some quick thinking from the Captain led him to turn the plane southbound and glided it over the Hudson. In currency markets, you always need to expect the unexpected – the sharp moves higher in GBPUSD over the weekend is testament to this. At Investec, we have a range of FX solutions to help you navigate changing market circumstances. For those that like to think outside the box, have you considered alternative FX solutions? Speak to your FX dealer today to learn more about solutions that can outperform the market rate and provide protection against freak incidents too.