nvestors are becoming increasingly concerned about major political event risks in Europe, namely the General Election in the Netherlands in March and the French Presidential Election in April. This, combined with reports of positive discussions between Donald Trump and Japanese Prime Minister Shinzo Abe over the weekend, forced the Euro below the 1.06 mark for the first time since 19 January.

The Pound was fairly range bound against the US Dollar on Monday, while rallying for the sixth straight session versus the Euro ahead of this morning’s UK inflation report. Inflation is expected to have accelerated to its fastest pace in nearly three years in January.

Chair of the Federal Reserve Janet Yellen will be the focal point of currency trading this afternoon when she delivers her first semi-annual testimony on the state of the US economy since Donald Trump was sworn into office at the end of January. Investors will, as always, be listening closely for clues as to her views on the likely pace of interest rate hikes this year.

Yellen appeared to support the idea of three rate hikes in 2017 at the end of last year. However, with economic data out of the US mixed in the past few weeks and Fed funds futures pricing in just two rate increases this year, Yellen’s perceived tone and forward guidance will be key to the US Dollar this afternoon.

Major currencies in detail

GBP

Sterling hovered around the 1.25 mark against the Dollar throughout much of trading yesterday, ending the London session 0.1% lower on the greenback. The lack of any economic or political news out of the UK meant that attention turned firmly to a busy day of economic releases today.

This morning’s inflation data out of the UK will be most significant economic data release out of the UK this week. Inflation has been on a steady upward trend since the Brexit vote, with the sharp depreciation in Sterling sending domestic prices inching closer to the Bank of England’s 2% target. Any reading in excess of the 1.9% consensus would likely provide good support for the Pound this morning.

EUR

Ongoing political concerns in the Eurozone ahead of key elections in France and the Netherlands sent the single currency 0.4% lower against the US Dollar as markets opened for the week on Monday.

The European Commission released its latest growth forecasts yesterday, suggesting that the Euro-area economy is set to slow less than expected in 2017. GDP for this year is now forecast to grow by 1.6%, compared to the 1.5% previously expected. Robust domestic demand amid near zero interest rates is expected to fuel the majority of the economic expansion in the currency bloc this year.

Today looks set to be a similarly busy day of economic data releases in the Eurozone. This morning’s fourth quarter GDP numbers, set for release this morning, are expected to show the Euro-area economy expanded by a relatively healthy 0.5% in the final three months of 2016.

USD

News of constructive talks between Trump and Japanese premier Shinzo Abe at the weekend led to a broadly stronger Dollar yesterday. The US Dollar index ended the session 0.3% higher against its major peers.

Janet Yellen will dominate trading in the US today when she presents the Fed’s semi-annual monetary policy report to Congress at 15:00 UK time. Fellow Federal Reserve member Dennis Lockhart will also be speaking this evening as investors look to gauge the extent to which the central bank will look through President Trump’s uncertain fiscal policies when deciding on the timing of the next monetary policy move.

We remain of the opinion that the next hike could be in March, although we’ll need to see a pickup in spending activity and retail sales before markets start pricing this in as a realistic possibility.