The pound rallies as rate cuts odds decline (Daily analysis 13.01.2021)

The link between the yield and currency strength seems to remain in place. Yesterday a dovish Fedspeak helped to fade the US Treasuries' recent bounce and consequently hurt the greenback.

The EUR/USD pair clawed back to the 1.22 mark. The GBP/USD has recently been outperforming as Governor Bailey cut speculation about an imminent rate cut into negative territory on Tuesday. The bounce might prove to be only temporary as rate cuts are not completely off the agenda and economic outlook has deteriorated lately due to sustaining of Covid-19 restrictions.

Noteworthy, crude oil benchmarks continue their ride higher with Brent trading around the 57.00 mark for the first time in eleven months. Consequently, oil currencies are supported. The Norwegian krone continues to trade firm and the Russian ruble bounces back from recent weakness. In the emerging markets space, Polish rate decision is one of the main events. We expect the central bank to hold rates at 0.1 pct, which might spur some zloty buying. The threat of further FX interventions remains valid, which limits the upside potential of the currency.

Markets unfazed by the political noise

Markets remain relatively uninterested in the political developments in the United States. Vice President Pence said he would not invoke the 25th Amendment to remove Trump from office before President-elect Biden's inauguration coming in a week's time.

Despite media reports, there is a "better than 50-50 chance that Senate Majority Leader McConnell would vote to convict President Trump in an impeachment trial", the efforts to impeach Trump seem to be doomed given the lack of time to set up a trial. Instead, the German CDU Party's Leadership election on January 15-16 should be watched, and Biden's fiscal announcement due on Thursday should be in the limelight.