GBP

Yesterday the pound recovered its losses for a second day and gained around 0.3% from the previous session against the euro. This was after data on Tuesday showed that UK government borrowing fell more than previously forecast in December. Thanks to higher tax receipts for the period, borrowing dropped to £16.8 billion in December which was far lower than the £18 billion expected. The UK economy shows strong signs of recovery from the pandemic as borrowing was down £7.6 billion from the previous year.

What also is supporting the pound against the euro is the fact that the market continues to price in an interest rate hike from the Bank of England for next month. Interest payments were up due to UK inflation running at a three decade high.

Today there is no top tier UK data to be released so investors will still be focused on political developments surrounding Downing Street. Ethics Chief Sue Gray is expected to release her findings from her inquiry into the “party gate” scandal soon. However the release of her report could still be delayed as Scotland Yard have confirmed they will also be investigating whether the alleged parties broke the law. Sterling could see some weakness depending on the outcome of the inquiry.

USD

The dollar is currently being driven by risk sentiment as the Russia-Ukraine conflict drives safe-haven flows to the USD.

The currency also strengthened against the euro even after positive German IFO data from yesterday, which saw a rise to 95.7 in January from 94.8 in December. It is the first increase in six months.

The main data release for the day will be the US interest rate decision this evening at 7.00pm. The market will be looking at whether the Federal Reserve will raise rates in the next few weeks or signal a reduction to its current asset purchasing program as early as this month. If the Fed look to remove stimulus sooner, this could lead to further USD strength against sterling and could test the levels last seen in December. Regardless of what the Fed decides to do, the market will likely be volatile and the USD will continue to be used as safe-haven.

Key announcements

19:00 – FOMC Statement 7.00pm
19:00 – FOMC Press conference 7.00pm
19:00 – Federal Reserve’s decision on rates – expected to left on hold at 0.25%