The most important market data this week is the inflation and labour market data. Inflation has been higher than forecasts for the last three months, hitting 5.4% in December. Most of the increase has been goods and energy prices, but the Bank of England is concerned about this feeding into services and wages. Markets expect another reading around 5.4% for January, with significant increases to come in April, potentially above 7% as energy prices rise.
The unemployment rate is likely to remain at 4.1%, just above the pre-pandemic level. Considerable uncertainty remains in the labour market, with the potential of a fall in employed numbers, whilst the market is still very tight. Underlying earnings growth will be closely watched as it relates to inflation and is expected to have fallen to 3.6% from 3.8%. Retail sales for January may have rebounded, though low consumer confidence given price rises will stunt any rebound.
The Bank of England Governor, Bailey made comments about workers not asking for inflation-chasing pay rises, suggesting the Bank of England want to avoid a wage-price spiral. Last week, Chief Economist Huw Pill suggested measured and purposeful steps in policy, as opposed to aggressive activism. This suggests at least some of the voices on the Monetary Policy Committee want to take a steady approach to rates. Markets are pricing for Base Rate to be 2% by the end of 2022.
GBPEUR – 1.1937
GBPUSD – 1.3541
Speakers from the European Central Bank tried to temper market interest rate expectations last week, with limited success. ECB President Christine Lagarde followed her recent hawkish comments by saying she favoured ‘gradual’ policy adjustments. There are now a number of weeks before the next key monetary policy announcements. Meanwhile, President Lagarde and Chief Economist Philip Lane are among ECB officials scheduled to speak this week. Lane’s comments could be interesting as he may defend the ECB’s inflation forecasts which show inflation falling back to the 2% target in the medium term.
EURUSD – 1.1345
EURGBP – 0.8378
Last week saw inflation increase to 7.5% in January, which is the highest for forty years. This was roughly where markets expected and a further rise to around 8% seems likely next month. The increasing concern for policymakers is that inflationary pressures seem to be broadening. This raises uncertainty about how quickly headline inflation will decline. The Federal reserve is expected to raise rates next month, most likely by 25bps, though a larger hike is possible.
This week, we have a number of central bank speakers, including the Fed’s James Bullard and Loretta Mester who will discuss the economic and policy outlook. The minutes of the last Fed meeting will also be released, which may provide further insight into the chances of a larger March hike and tapering.
Producer prices, retail sales and industrial production are the main data points of the week. Retail sales slumped in December, but the January figures are expected to rebound by around 1.5% in a post-Omicron rebound. Producer price inflation figures will also be keenly watched for evidence of inflation pressures. The concern for policymakers is increasingly that US inflation is broadening out beyond categories such as food, energy and used-car prices.
GBPUSD – 1.3541
EURUSD – 1.1345
Do get in touch if you would like to discuss further.
*Interbank rates correct at 7 am on the date of publishing.