Retail sales data failed to support GBP rally above 1.37. PMI reports also delivered a heavy blow for the British currency, especially in the services sector, where the index of activity fell to 38.8 points (vs. 45 points forecasts). In other words, markets expected a minor slack in the sector’s activity but got sharp deceleration. Regarding retail sales, MoM growth figure is a big negative surprise, just 0.3% (1.2% forecast). There may be definitely a revival of speculations about negative rates from the Bank of England, effectively killing upside momentum in GBP.

UK PM Johnson added to the darkening news background, saying that the third round of lockdowns could drag on until the summer. This could force investors to reassess economic damage to the British economy, which should be reflected in additional GBP weakness. GBP move against its main peers (EUR and GBP) is significant with losses reaching 0.5% against both. The suddenly changed tone for lockdowns and the economy certainly allows us to consider a deeper correction - to 1.3550 for GBPUSD and 0.90 for EURGBP next week, as the fundamental background should create some sustainable momentum:

Germany's service sector is emerging from the crisis driven by the December lockdown, PMI data showed. As in other countries, Germany's service sector has suffered more than the manufacturing sector. Activity indices in January turned out to be slightly than expected (51.5 points against 50.5 forecast), while positive impulse in production, judging by the data, gave the first signals of slowing down (57.0 points against 57.5 forecast). PMI data for the Eurozone indicate that expansion of activity flatlined in January.

The latest unemployment claims data pointed at welcomed albeit fragile balance in the US labor market. Claims for unemployment benefits stopped accelerating and even slowed down slightly compared to the previous week. Initial claims rose by 900K (forecast 910K), continuing claims fell to 5.04 million (forecast 5.4 million). Activity in private construction - both building permits (+4.5% MoM) and housing starts (+5.8% MoM) somewhat soothed investors’ concerns about deterioration in the US housing market.

Regarding the ECB meeting, there was no major surprises from Christine Lagarde, however, inflation data contained some encouraging news for the euro. Professional forecasters of the ECB have revised upward the forecast for inflation expectations, which bodes well for normalization of interest rates as the ECB takes into account this data as well.

Source: Frederik Ducrozet

Powell is speaking next week and he certainly won't talk about rates normalization given the upcoming $ 1.9 trillion stimulus package. Otherwise, there is a risk of destabilizing market rates, which is not in the interests of either the Fed or the government. Given the moderate positive from the Bank of Norway, Canada, hidden positive from the ECB, USD index could dive below 90 again next week ahead of Wednesday's meeting with the biggest move seen in EURUSD.

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