Dollar Rebounds, Sterling Cheers Fiscal Headroom and Euro Treads Cautiously.

USD Update: The US dollar staged a robust comeback recently, shedding the earlier optimism fueled by Beijing’s reported stock support. Despite the emergency nature of Beijing’s measures, there’s skepticism about their ability to address fundamental economic concerns. A potential game-changer is the impact of US Republican Primaries, with the Mexican peso signaling market uncertainties around a possible Donald Trump comeback. Trump’s recent victory in the New Hampshire primary has raised questions about Nikki Haley’s campaign. Meanwhile, Banxico’s potential entry into a rate-cutting cycle may keep the peso soft, although demand is expected to persist due to carry attractiveness and a projected US dollar decline.

GBP Insights: News of the UK’s public borrowing in December significantly undershooting expectations is welcomed news for Chancellor Jeremy Hunt and the Pound. The Office for National Statistics revealed that public sector net borrowing was only £7.8 billion, well below the expected £14 billion. Analysts predict that this fiscal headroom could increase to around £20 billion in the upcoming Budget, potentially allowing for tax cuts. Any increase in spending could boost economic growth and delay the Bank of England’s rate cut, presenting positive prospects for the Pound.

EUR Overview: Central bankers and board members have been pushing back against heightened interest rate cut forecasts, but global rate cuts seem inevitable this year. The ECB meeting this Thursday might not provide a clear timetable for rate changes, with the March 7th meeting being a more likely candidate. Both the UK and Eurozone face uncertainties, witnessing a decline in loan and credit demands in Q4. The UK’s economy remains relatively resilient, with high inflation reducing expectations of easing by the Bank of England in 2024. The ECB’s stance, to be revealed on Thursday, and President Lagarde’s tone could influence market expectations, with investors currently forecasting 150 bps of rate cuts in 2024. In comparison, the Bank of England’s meeting on March 6 is expected to involve less easing (125 bps in 2024), giving a slight advantage to the Pound over the Euro.