EUR (1.074) ▲

• The surge in both the USD index and the 10-year US Treasury yield, rising above 104.0 and 4.2%, respectively,has exerted significant pressure on the EUR, causing it toweaken by close to 3.0% year-to-date. The strength of USassets can be attributed to the reassessment of Fed easingexpectations, driven by unexpectedly robust US jobs dataand a hot core CPI release. However, the EUR managed totrim some losses due to the weak US retail sales reading.

• The pushback on rate cut bets by ECB officials, prompted by inflationary risks amid strong wage pressures, may helpkeep the bloc’s currency anchored around the 1.075-1.085level in the coming weeks. The ECB is expected to hold ratessteady, at least until European wage negotiations areconcluded. If wage growth exceeds expectations, the ECBmight defer its first rate cut to July or September, potentiallystrengthening the EUR, especially considering ourexpectation of an earlier Fed cut in June.
  
  GBP (1.256) ▲

• The absence of robust disinflation momentum in the US has significantly reduced market expectations for Fed rate cutsin 2024, with projections now indicating four cuts instead ofseven. This, combined with below-consensus UK CPIreadings, has pushed the GBP to trade weak below the1.26/USD level. However, pushback from the BoE, citing thenecessity for "further evidence of wage moderation" beforeconsidering a rate cut, has helped limit losses for the pound.
• While the UK economy slipped into a technical recession at the end of 2023, its wage growth remains above marketexpectations. Additionally, more signs of a pick-up inconsumer activity may prompt the BoE to refrain fromadopting a more dovish stance, benefiting the GBP in thenear term. However, the robust macro conditions in the USmay continue to exert pressure on the pound.

Source: Kenanga Research - 16 Feb 2024