n addition to the very stretched positioning brought about by the weeks of relentless sell-off, the US payrolls report finally showed signs that the tight labour market is leading to higher wage increases – news that the Federal Reserve will be quite pleased to hear. The repricing of interest rates in the US knocked off asset prices worldwide, as 10 year US Treasuries rose to multi-year highs.

In currency markets, rising yields and the payrolls report stabilised the Dollar against European currencies and sent it sharply higher. The Japanese Yen had a particularly difficult time, as the Bank of Japan sought to reaffirm its commitment to loose policy by increasing its short term bond purchases. Emerging market currencies generally had a rough week as well, brought down by the rise in US yields and the general bout of risk aversion spreading through equity market after the extraordinary recent gains.

This week’s key event will be the Bank of England meeting on Thursday. Eurozone business activity PMI indices out on Monday should do little more than confirm strong prospects for growth. In a light week for data, US political developments, namely the expected passing of another short-term spending bill aimed at preventing yet another government shutdown, should be the driving factor for the US Dollar.

Major currencies in detail

GBP

Last week was a mixed one in terms of macroeconomic data in the UK. Weakness in construction business activity indicators rekindled concerns about a widening differential in economic performance between the Eurozone and the UK. Markets continue to be focused on the absence of bad news regarding Brexit negotiations, and the prospects for higher interest rates in the UK. Consequently, the Pound ignored the data and ended the week unchanged against both the Euro and the Dollar.

This week’s big event is the February meeting of the Bank of England on Thursday. No action is expected by the markets, but traders will closely scrutinise the quarterly Inflation Report for clues on the exact timing of the next hike in short term interest rates.

EUR

More of the same from the Eurozone last week. While the PMI business activity indices and GDP growth numbers confirmed a strong economic upswing is underway, there are no signs that this has, as yet, filtered through into any sustained price pressures. January core inflation confirmed that this key indicator is languishing far from ECB targets, driven down by weakness in German prices.

There will be no significant data out this week in the Eurozone, so the common currency will likely trade on developments elsewhere. The widening yield differential with the US and the fresh record long Euro positioning, in our view, make the Euro vulnerable to a significant short term pull back.

USD

Strong data finally put a floor under the US Dollar last week. The most relevant news was undoubtedly the surprisingly upbeat payrolls report for the month of January. In addition to a very strong pace of job creation and low unemployment, we finally saw healthy wage increases, exactly the kind of data that the Federal Reserve had been hoping for. Wages rose by 2.9% on the year, far outpacing inflation. Previous data were revised upwards as well.

We now go into a relatively light data week in the US. We think that the march upward in yields will continue, as markets move to price in four full 25 basis point Federal Reserve hikes in 2018, and this will put upward pressure on the US Dollar against all its peers.