• USD: Inflation Concerns Linger
  Markets remain cautious as US data slows and inflation concerns persist amid elevated starting points for Trump’s policies. Despite stretched dollar positioning, no clear catalyst for a correction has emerged.
• EUR: Limited Downside for EUR/USD
  EUR/USD stabilizes at 1.0300, factoring in a risk premium tied to protectionist policy uncertainty. Speculative short positioning limits further declines, despite ongoing ECB dovishness and subdued eurozone inflation.
• GBP: Retail Sales Disappointment
  UK retail sales fell 0.3% in December, missing expectations for a 0.4% rise. The Pound dropped as consumers tightened spending amid financial pressures, with food stores seeing their weakest performance since 2013.
• Consumer Shifts and Retail Challenges
  Leisure spending (travel and dining) shows resilience, but rising wages and tax burdens in 2025 are set to pressure UK retailers as they pass higher costs onto consumers.
• BoE: Rate Cuts Expected
  Sluggish growth and cooling inflation increase expectations for Bank of England rate cuts, with markets predicting a February reduction and more throughout 2025.

USD: Inflation Stays in Focus
FX markets may adopt a cautious stance today as the flow of US economic data slows and traders await Monday’s presidential inauguration.

Optimism over a slight month-on-month slowdown in core inflation remains tepid. Markets, always forward-looking, are already grappling with inflationary pressures stemming from Trump’s policies, which begin from an elevated baseline. Despite stretched positioning and short-term overvaluation, the dollar has yet to encounter a decisive catalyst for a correction.

Yesterday’s Senate hearing for Treasury Secretary nominee Scott Bessent offered little market impact. While advocating reduced discretionary government spending—a key Trump agenda—Bessent avoided sounding as hawkish on tax cuts as the President. This reflects a trend from the previous Trump administration, where cabinet members often softened the President’s bold fiscal statements.

Today’s US calendar includes housing starts and industrial production, both expected to show strength. Meanwhile, the Federal Reserve enters its communication blackout tomorrow ahead of its January 29 meeting, signaling possible stabilization across dollar crosses.

EUR: Risk Premium Weighs on Stability
EUR/USD has settled near the 1.0300 mark, reflecting a 2.5-3% risk premium tied to uncertainties around Trump’s protectionist policies.

Despite this undervaluation, speculative net short positioning on EUR/USD (11% of open interest, per CFTC data) suggests limited downside potential barring major USD-positive developments.

The eurozone’s final December CPI reading, expected to confirm core inflation at 2.7%, highlights the European Central Bank’s consistently dovish stance. This will likely keep monetary policy a drag on the euro in the near term, maintaining EUR/USD stability around 1.0300 today.

GBP: Retail Sales Shock Drags the Pound
The British Pound slid against the Euro and Dollar following disappointing UK retail sales data for December.

GBP/EUR dropped from 1.1872 to 1.1842, while GBP/USD slipped from 1.2215 to 1.2185. Expectations for a 0.4% rise were dashed by a -0.3% decline, signaling economic headwinds as consumers tighten spending amidst rising costs of living.

Year-on-year, retail sales rose just 3.6%—well below the 4.2% consensus—driven by a sharp 1.9% monthly drop in food store volumes, the lowest since April 2013. Analysts cite financial pressures and cautious consumer behavior as key contributors.

Phil Monkhouse of Ebury notes that with Bank of England rates at 4.75% and persistent growth concerns, consumer confidence may remain under pressure. However, PwC’s Lisa Hooker observes bright spots in leisure spending, as consumers prioritize experiences like travel and dining over traditional retail.

As rising wages and tax burdens take effect in 2025, retailers may face further challenges. National Living Wage hikes and employer National Insurance increases are set to drive higher costs, forcing businesses to pass these onto consumers.

David Paulding of Nextiva predicts a tough year ahead for retailers, compounded by slower sales, growing taxes, and heightened customer expectations.