GBP

The pound remains well supported as hopes of a rate hike next month along with covid cases continuing to fall has helped the pound hold its value against both the euro and dollar.

The UK government is planning to cut the self-isolation period from seven to five days, a move which could bolster the economy. With falling cases and shorter self isolation times, this could lead to an economic rebound in February. Another reason for the Bank of England to possibly increase interest rates again.

Money markets are starting to price in a rate hike with a more than 70% chance next month, and analysts believe we could see interest rates as high as 1% towards the end of the year, much higher than the US.

USD

The US dollar remained stable on Monday as investors await clues from Federal Reserve Chair Jerome Powell on the timing and pace of policy decisions. In his opening remarks, Powell will pledge to prevent high inflation from becoming “entrenched,” but will make no mention of plans for the path of monetary policy.

Analysts believe the Fed are likely to raise rates a lot sooner than expected. Money markets are pricing in an increase by May, with two more by November. However the Fed could look to raise as early as March but this is very dependent on economic data.

Wednesday will see the release of inflation data with headline CPI seen coming in at 7% on a year-on-year basis, boosting the case for an early increase in interest rates.

Key announcements

10:20 – EUR – ECB President Lagarde speaks
15:00 – USD – Fed Chair Powell testifies