This week, all eyes will be on the inflation figures which are expected to fall for a third month in a row. It may still stay above 10% with forecasts of 10.1%, though this is showing a slower decline than in the US and Europe. Core inflation will also likely have fallen slightly from 6.3% to 6.1%. The general picture is that inflation is only falling gradually and the fall in wholesale gas prices will likely come through in the second half of the year. Bank of England policymakers continue to raise concerns about the tight labour market and the impact on services inflation, which could keep making inflation more persistent.
We will also see some more data from the labour market tomorrow. It will show the latest total weekly hours worked and unfilled job vacancies. Both of these measures have been easing, though remain high. One of the most important elements is whether the softening of the labour market is having an impact on earnings growth. Markets expect the total pay to fall slightly to 6.2%, though regular pay without bonus may even accelerate to 6.6%. This persistent wage inflation will certainly worry the Bank of England. Chief Economist Huw Pill is speaking this week and may offer more insights into his thinking.
Last week, we saw a sharp fall in December GDP of 0.5%. This resulted in the final quarter GDP being flat, which means the UK just dodges a technical recession for now. The fall in GDP in December was mainly put down to the impact of strikes and cold weather. The Bank of England still expects the economy to shrink by 0.5% this year. One of the dovish members of the BoE, Tenreyro suggested that only 20% of the impact of rate rises has fed through to the economy.
GBPEUR – 1.1284
GBPUSD – 1.2050
The data calendar for Europe is fairly quiet this week. The final quarter GDP is likely to confirm a very slight growth of 0.1% in the Eurozone. This is in contrast to earlier forecasts of contraction at the end of last year. Industrial production ended the year on a weak footing with a monthly fall forecast to close out the year of 0.7%. The European Commission will be providing updated economic forecasts today, which may give some insight into the impact they expect to see from the rate hikes that have already taken place.
EURUSD – 1.0679
EURGBP – 0.8862
We will see January CPI inflation this week, which is expected to fall slightly again from 6.5% to 6.4%. Markets are forecasting core CPI to fall a little more from 5.7% to 5.5%. We are also likely to see a strong increase in retail sales, partly driven by car sales, of 1.5%. We expect industrial production to also show a rise of 0.5%, to round out an ongoing positive set of economic data coming out of the US. The dollar gained further as Federal Reserve Chair Powell and other Fed policymakers reiterated the need to raise interest rates further and keep them higher for longer.
Overall, the US data continues to give the impression that economic activity started the year strongly. For now, the Fed look likely to continue to raise interest rates further and to push back against market expectations for rate cuts this year. With uncertainty about prospects for economic growth and inflation staying high, markets will be sensitive to incoming data and central bank comments.
GBPUSD – 1.2050
EURUSD – 1.0679
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*Interbank rates correct at 7 am on the date of publishing.