The dollar’s popularity was called into question yesterday as the Federal Reserve took a dovish tone towards future rate hikes. The greenback performed better than its rivals last year, supported by gradual, consistent interest rate rises and the strong economic data that reinforced the increases. Fewer rate hikes are now being priced in for the coming year, as worries over the US-China trade war have crept back into view, placing downward pressure on growth. Fed chairman Powell also cited slowing growth overseas as well as the impact of the longest government shutdown in recent history as reason to remain wary. The change of tune from the central bank has led many to forecast that the buck could relinquish the majority of its 2018 gains however, others believe the US economy will likely outperform its peers, lending greater strength to the dollar over the next 12 months.

This morning, the pound will be preparing for a turbulent day with the Bank of England’s inflation report and votes on interest rate rises at 12pm today. Interest rates are fully expected to remain as they are, although the Inflation report will keep markets on their toes with investors listening for hints to future monetary policy. The Governor, Mark Carney, will head the usual accompanying press conference half an hour after the votes, with his comments pored over for indications on how the bank plans to navigate the UK through the cloud of Brexit uncertainty.

Today’s key events

The midday meeting at the Bank of England will be the day’s main focus with heightened volatility for sterling crosses expected.

Italian retail sales numbers this morning came in below expectations but given the current fragility of the Italian economy, this was hardly surprising, and the euro weakened briefly in accordance. EU economic forecasts were also updated this morning, with the European Commission cutting its growth forecast for the year with growing trade tensions responsible for the revision.

Unemployment claims from the US as well as a speech from FOMC member, Clarida, this afternoon will keep markets focused from 13:30.

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