Key Data Week: Pound Gains, Euro Struggles, and the Fed Takes Centre Stage

GBP

The Pound strengthened against both the Euro and the Dollar this morning following robust UK wage data. The latest ONS report showed that regular pay (excluding bonuses) rose to 5.2% in October, surpassing expectations of 5% and up from 4.9% previously. This gave the Pound a lift, with GBP/EUR breaking through 1.21 and GBP/USD briefly touching 1.27 before settling back to 1.2690 at the time of writing.

Wage growth remains a key driver for Sterling, even in the face of some weaker economic data. For example, employment figures have softened, with the number of employed people dropping to 173k in the three months to October, down from 253k previously.

Looking ahead, it’s a busy week for UK data, which could set the tone for Sterling’s direction:

• Wednesday – Consumer Price Index (CPI): A critical measure of UK inflation. The last reading came in at 2.3%, but there’s no clear consensus for this week’s figure. A higher reading could strengthen the Pound, while a drop below 2.3% would likely lead to weakness.
• Wednesday – Retail Price Index (RPI): Another measure of inflation, RPI tracks changes in the prices of a weighted basket of goods and services.
• Thursday – Bank of England (BoE) Interest Rate Decision: The BoE is widely expected to hold rates steady at 4.75%. A surprise rate hike would be bullish for the Pound, while holding rates or signalling potential cuts could see Sterling weaken.
• Friday – Retail Sales: A key indicator of consumer spending in the UK. Retail Sales are currently at 2.4% but are expected to drop sharply to 0.1%. If the data meets or underperforms this expectation, it could weigh on the Pound.

EUR

The Eurozone economy showed signs of improvement in December, with the latest PMI data rising to 51.4, indicating a return to growth, thanks to a stronger services sector. However, the manufacturing sector remains weak, and Germany’s PMI reading of 47.8 continues to hold back optimism for the Euro.

Germany’s economic struggles could lead to increased promises of fiscal stimulus from political parties, especially after yesterday’s no-confidence vote triggered snap elections in two months. That said, uncertainty around Germany’s strict fiscal rules makes it unlikely markets will price in significant fiscal support just yet.

Looking ahead, the focus remains on upcoming data and European Central Bank (ECB) policy:

• Friday – Consumer Confidence: A key measure of consumer sentiment. Confidence is expected to fall further from -13.7 to -14, which could weigh on the Euro as lower confidence tends to slow economic activity.

For now, expectations of further ECB rate cuts remain the main driver of sentiment for the Euro.

USD

The US Dollar is in focus this week as markets anticipate key updates from the Federal Reserve and economic data releases.

Traders are nearly certain the Federal Reserve will cut interest rates by 25 basis points to a range of 4.25%-4.50%. While this move is widely expected, attention will shift to Fed Chair Jerome Powell’s press conference and the updated “dot plot” for signals on future rate decisions.

Market sentiment has begun to shift slightly, with expectations that the Fed’s policy stance may move from “dovish” to “slightly hawkish.” This is based on a view that inflation risks are rising while concerns over employment are easing. Recent data backs this up—December’s Flash US PMI showed employment rising for the first time in five months, driven by gains in both manufacturing and the service sector.

Looking ahead, here are this week’s key events:

• Wednesday – Interest Rate Decision: A rate cut to 4.5% is expected. While a cut would normally weaken the Dollar as investors look for higher returns elsewhere, Powell’s comments could determine the market’s reaction.
• Thursday – Gross Domestic Product (GDP): A measure of economic output, GDP is expected to hold steady at 2.8%, signalling resilience in the US economy.
• Retail Sales: This measures consumer spending across retail and food stores. Currently at 0.4%, it’s forecast to rise slightly to 0.5%, which would be seen as positive for the Dollar.

For now, the Fed’s tone and economic data will play a key role in shaping the Dollar’s direction in the days ahead.

Current Interest Rates and Inflation Figures

• UK – Interest rate = 4.75% and inflation = 2.3%
• US – Interest Rate = 4.75% and inflation = 2.7%
• EU – Interest Rate = 3.15% and inflation = 2.3%

If you have an upcoming currency requirement and would like to hear more about what is affecting the markets in the coming weeks, please contact us on 020 3876 5432.