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Could A Big Week Of Data Release Alter Sterling’s Direction?

Last we saw Sterling continue its rise across the board as the UK appears to have avoided any further restrictions. There was some positive news surrounding the UK economy which showed growth that surpassed its pre-pandemic size in November for the first time since COVID-19 struck. Gross domestic product rose to 0.9% from October when it gained 0.2%; output was 0.7% above its level in February 2020, before the pandemic started. However, with restrictions introduced because of the spread of omicron, softer numbers will likely be seen in December and January.

However, there could be some disruption if we continue to see political developments sour for Prime Minister Johnson. Following the various indiscretions surrounding lockdown parties, PM Johnson was forced to apologise to the House and Commons whilst No 10 apologised to the Palace. It has been reported that five letters have been submitted to the 1922 committee stating “no confidence” in his leadership. The market awaits the findings of the Sue Grey investigation.

Looking to the week ahead it is a busy week for UK data. On Tuesday the labour report is due to show the unemployment rate and claimant change. With the impact from the furlough ending dissipating, the market will be keen to see if momentum in the right direction can continue. Of particular interest will be the average earnings (salary inflation) to articulate its direction. On Wednesday we have the UK inflation data set for release on Wednesday. After the sharp rise in November to 5.1%, its highest level for almost 30 years, it is expected that the annual headline inflation will hold steady from December. However, with gas prices having again moved sharply higher and when the energy cap is removed in April, it is expected that we could see inflation rise above 6%. On Friday, the December retail sales and the January GfK consumer confidence measure will both provide updates on the consumer sector. Short-term movements in retail sales are always difficult to forecast and Omicron makes the picture even murkier than usual.

Dollar Concedes Ground On Softer Stance

The Dollar was on the backfoot following FOMC Chairman Jerome Powell testimony as he adopted a cautious approach to the Federal Reserve’s (Fed) policy outlook. During comments before the Senate, Powell signalled that price pressures are expected to last well into 2022 and the Fed’s focus remains primarily on inflation over full employment. In a less hawkish tone than the recently released December minutes report, he commented that the Fed would potentially need several meetings to devise a plan on how it would reduce its balance sheet on the path to policy normalisation. In the meantime, inflation remains elevated. The Consumer Price Index increased to 7% year-on-year, with the core reading (excluding food and energy prices) beating expectations at 5.5% in December, up from 4.9% in November. The latest figures will continue to put pressure on Fed policymakers to adopt a faster pace of policy tightening with several top banks now forecasting a March rate hike, with three further hikes in 2022.

Looking to the week ahead, it is a quieter week with it starting on a bank holiday for Martin Luther King Day. The key data reading is due on Thursday with the release of the Philly Fed Manufacturing, jobless claims and existing home sales all hitting the wires.

In The Eurozone, Inflation Opinion Remains Split

Opinions surrounding whether inflation is transitory or not were high on the agenda last week. Joachim Nagel, Germany’s new Bundesbank Chief, urged the European Central Bank (ECB) to “be on the alert” and get a grip on surging European inflation during the virtual ceremony marking the change in the office of the German Central Bank yesterday. He noted continued discontent in Germany over rising inflation, in fact, the highest it’s been since June 1992 at 5.3%, as well as years of negative interest rates. Nagel also commented that the current 5% inflation figure is not entirely due to transitory or temporary factors and that the inflation outlook within the single bloc remains uncertain. In contrast, ECB economist Philip Lane commented that inflation will retreat below the Central Bank’s 2% inflation target in 2023 and 2024. In the meantime, the Eurozone Industrial Production figures surprised significantly to the upside, increasing by 2.3% for November against a forecasted increase of 0.1%.

Looking to the week ahead, the market will focus on the German ZEW survey that is set for release on Tuesday which will focus on sentiment from German institutional investors and analysts. The minutes of the ECB’s December meeting are due for release on Thursday. These will provide further details of the policy changes announced at that point, including the changes to its asset purchase programme. Also due for release are the inflation numbers on Thursday and consumer confidence on Friday.

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