USD strengthened against all major currencies on Tuesday

GBP

The pound fell against the US dollar as demand for the greenback picked up and edged higher across the board. The pound fell more than 1%, its biggest drop since mid-December. The downtrend in Sterling is more to do with the dollar strengthening as risk sentiment increased.

Furthermore, Sterling could see a bumpy road ahead with the UK economic outlook looking bleak, along with higher inflation, recession fears and the cost of living crisis.

PMI data released on Tuesday showed British manufacturers reported one of the sharpest falls in activity in over a decade. PMI saw a reading of 45.3 in December from an expected 46.5. This is the lowest reading since May 2009 apart from two months at the start of the COVID-19 pandemic in 2020.

USD

The dollar strengthened against all major currencies on Tuesday with investors now looking towards the Federal Reserve minutes for further clues.

Last month saw the Fed increase interest rates by 50 basis points after delivering four consecutive 75 basis points rises. The Fed still stresses that more rate hikes will be needed to curb inflation.

Investors will watch for signs of how concerned the Fed is about persistent inflation and its thoughts on the labour market. However, this may not move markets as much as the key indicators will be labour data released later this week along with inflation data next week.

A robust labour market is viewed by the Fed as ground to keep raising interest rates whilst inflation is still considered as being very high. With jobs data set to be announced on Friday and inflation figures on January 12, these releases will give a better picture as to what the Fed needs to do next.

Key announcements

09:00 – EUR – Final services PMI – set to remain unchanged at 49.1

15:00 – USD – ISM manufacturing PMI – Forecast at 48.5 from previous 49

19:00 – USD – FED meeting minutes