US Dollar Dips, EUR and GBP Inflationary Projections.

USD: The US dollar, gauged by the DXY index, continued its downward trend, slipping below the 102.00 mark to its lowest point since early August. This decline was prompted by a plunge in US Treasury yields, triggered by the unexpectedly dovish stance of the Federal Reserve in its December meeting. The Fed hinted at a potential shift in strategy, with Chairman Powell acknowledging discussions about rate cuts. The Summary of Economic Projection revealed a dovish outlook, predicting 75 basis points of easing in 2024 and 100 basis points in 2025. This sudden drop in yields reshaped the Treasury curve, creating a bearish atmosphere for the greenback.

EUR: The European Central Bank (ECB) acknowledged a recent drop in inflation but anticipates a temporary rebound in the near future. Eurosystem staff projections foresee a gradual decline in inflation throughout the next year, reaching the Governing Council’s 2% target in 2025. Staff projections revised downward for 2023 and 2024, with headline inflation expected at 5.4% in 2023, 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026. Despite subdued near-term economic growth expectations, the ECB emphasized the need to maintain current interest rates for an extended period.

GBP: The Bank of England’s statement cautioned against complacency in the fight against inflation, emphasizing uncertainty regarding the trajectory of wage growth and services inflation. While recent inflation data showed positive signs, particularly in core and headline measures, the focus remains on services inflation, where pressures are yet to show conclusive easing. The Monetary Policy Committee highlighted the necessity of maintaining sufficiently restrictive interest rates for an extended period to achieve the 2% price target. Notably, one-third of the nine voting members continue to advocate for rate hikes.