The pound sterling hits long-term highs (Daily analysis 27.01.2021)

Risk rout proved to be short-lived, and risk assets and currencies recovered the ground lost early Tuesday. The markets remain rough ahead of the Federal Reserve meeting.

On Wednesday morning, the pound is the strongest against the dollar since May 2018. The euro trades lower on ECB comments. The knot has reiterated that the bank is monitoring the currency's strengthening; there is room for a rate cut and tools to counter euro appreciation. The main currency pair slipped on those comments towards the 1.21 handle and continues to trade without a strong directional conviction. For now, the upside seems to be capped by 1.22 mark, and the EUR/USD pair should move sideways. The logistical obstacles and slow pace of the EU's vaccination programme contrast with the prospect of the US economy.

The IMF revised up its forecast for the US to 5.1% in 2021, due to stronger than expected momentum at the beginning of the year and the fiscal stimulus package approved in December. Noteworthy, IMF considers the possible new package of USD1700bn proposed by Joe Biden and his administration, so there may very well be upside to the IMF's forecast. In contrast, the euro area is expected to see a weaker rebound than previously anticipated. The ECB's stance and a clash of economic outlooks, for now, do not point to further EUR/USD gains in the first quarter of 2021.

The ECB is considering rate cuts, but some of the central bankers start to prepare market participants for rate hikes. The Czech koruna appreciated markedly yesterday following an interview with CNB governor Jiri Rusnok. It should remain supported and trade firmer than peers (especially the Polish zloty) given the possibility of even two rate hikes by the end of the year. The Federal Reserve meeting is the day's key event, but no new policy measures should be announced. Instead, the markets will look for any clues if the Fed might opt to abandon the pandemic policy stance earlier in the wake of new fiscal stimulus and the vaccine roll-out.