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Sterling makes a solid start to 2024

Risk events ahead this week with US inflation on Thursday & UK GDP on Friday..

A KPMG jobs report released on Friday strengthened the Pounds position, as it suggested wage pressures in the UK remain elevated. The BoE have repeatedly explained that it requires a notable wage decline (as-well as a rise in the unemployment rate) if it is to bring UK inflation down to its 2% target on a sustainable basis. 

This has pushed back bets slightly on when the BoE will start cutting rates this year, which is currently the main market driver. At the moment, it looks like Q3 will be the start of rate cutting and by no more than 1%. Potentially a lot later than the ECB & especially the Fed and by less.

Going with that narrative, it looks like GBP is in for a good run for at least the first half of this year. But when involved in a hugely volatile market (and the biggest in the world by some distance), things never play out so easily. The first major test of 2024 for the Pound arrives on Friday with November's GDP result. 

The growth picture in the UK isn't pretty and it is going to take something very special to give GBP a lift at any point this year when this specific data is released. So when GDP figures arrives each month, we expect either a non-event (sidewards move with a correctly predicted result) or for the £ to get weaker if the reading is lower than anticipated. 

There is absolutely nothing of note for the Euro-Zone this week and so the single currency will be playing the 'sitting duck' role, a part that turned out pretty well overall in 2023 for the Euro. It was a strong year for the € last time out and once again the ECB will determine its fate in 2024. 

The US Dollar is by-far-and-away the worlds largest trading currency and so holds huge weight in what goes on in the FX market. Data-houses are split in their views in what 2024 looks like for USD, which helps nobody at all. But right now, the US is performing strongly and this brings confidence to investors to move their funds into more risky assets and therefore away from the USD as a safe haven currency, in-turn bringing down its value.

A major factor in determining what the Fed does with interest rates (which directly effects the Dollar) is what happens with the inflation rate. The current headline rate is close to target and the core inflation rate is also coming down steadily. If Thursday shows December's rates are continuing the decline, money markets will price in a US interest rate cut sooner, which will see a drop in $ value.