he result was that the US Dollar last week failed to benefit from either Chair Yellen’s optimistic semi-annual speech to Congress, or the significant upward surprise in US inflation during the month of January, and it ended the week essentially unchanged against every G10 currency save Sterling, which suffered from suggestions that the European Union was going to take a tough approach to Brexit negotiations.

This week is fairly muted in terms of notable economic news or policy announcements. Political events will continue to be the focus for markets. French and Dutch election polls, the possibility of a pact between the left candidates in France, and leaks coming from the Trump Administration will command attention. The main macroeconomic news is the release of the Eurozone flash PMI business indices, which will provide a key test of our view that the Eurozone economy is improving faster than expected.

Major currencies in detail

GBP

Last week was difficult for Sterling. The economic dataflow was not supportive and we saw downside surprises in the two main events, CPI inflation and retail sales. In fact, we may draw some comfort from the fact that in such a negative context the Pound closed the week largely unchanged.

On Wednesday, we’ll get the latest GDP growth figures for the fourth quarter. This is a lagging indicator, but we think risks are skewed to the upside and a large positive surprise would be supportive of the Pound.

EUR

The ECB minutes stuck strictly to the recent script. Policy will remain firmly accommodative, the Bank will look through recent inflation increases driven mostly by energy prices, and risks remain skewed to the downside. It is very difficult to envision any sustained rally in the common currency until a significant change in the ECB’s view is evident, and we are nowhere near that as of yet.

This week we get the most important high frequency indicator out of the Eurozone, the PMI business sentiment indices. Consensus expects the composite PMI to remain unchanged, which will mean the Euro will trade primarily in reaction to news from the French and Dutch elections.

USD

Chair Yellen’s optimistic testimony to Congress was followed by strong upward surprises in inflation and retail sales. The inflation figures were particularly important in that they provide serious evidence in support of the “reflation trade”: the notion that low interest rates and low unemployment are finally providing the basis for some modest inflationary pressures to develop.

The release of the minutes from that last Federal Reserve meeting on Wednesday will be the main event for markets this week. In our view, any hints that a March hike is in the cards will lead markets to reprice their expectations of such a hike, currently at just under 40%, and could provide the boost the Dollar needs to break out of its recent range.