As household spending becomes more vulnerable and a steep pessimistic outlook emerges among business owners regarding the economic landscape, the BoE is anticipated to face challenges in reaching a decision due to persistently higher price pressures and fears of a recession. This predicament may make it challenging for policymakers to adhere to a restrictive interest rate stance. Nevertheless, despite the looming recession fears, Sterling has shown resilience against both the Euro and US Dollar this morning, currently trading at 1.1675 and 1.2707, respectively.
The latest report from the ONS delivered unexpected news as annual Retail Sales witnessed a shocking 2.4% decline vs a consensus of 1.1% growth. The downturn was attributed to households engaging in Christmas shopping earlier than usual, with significant decreases noted in sales at food stores & supermarkets. This sharp drop in consumer spending points to an escalating cost-of-living crisis, amplified by higher interest rates and price pressures. Notably, the latest estimates from the ONS indicate a contraction in Q3 GDP of 2023 by 0.1%. If the economy contracts further in Q4, it will signify a technical recession.
Turning to inflation, the UK economy is grappling with core inflation at 5.1% and the service price index at 6.4%, serving as the BoE’s preferred inflation indicators when considering monetary policy decisions. BoE find themselves in a predicament, caught between maintaining a restrictive policy stance to address higher inflation or loosening tight interest rates to shield the economy from the looming threat of a recession.
On the data front this week, we anticipate the Purchasing Managers’ Index (PMI) report scheduled for Wednesday at 9:30 am. The current consensus is only marginally above the figures from the previous month. Any positive deviation from consensus would suggest a less negative outlook for the UK economy, potentially boosting the strength of the Pound, and vice versa. It’s worth noting that Eurozone PMI data is also on the horizon just before, adding an extra layer of anticipation as markets closely observe to discern the potential impact on the direction of GBP|EUR.
The Euro faced a decline in value today as market attention turns towards two key events: the Eurozone PMI release on Wednesday and the European Central Bank’s (ECB) Monetary Policy Statement on Thursday. Anticipation of these events is likely to contribute to increased volatility in the currency this week. The ECB is working to counter expectations of aggressive rate cuts, and the market consensus suggests that interest rates will be maintained at 4.5%. Notably, there has been a shift in the anticipated timing of a rate cut, with June now favoured over previous expectations of March/April. The guidance provided by the ECB in its forward-looking statements will be crucial in determining the Euro’s trajectory post-release.
Wednesday’s release of the Eurozone Purchasing Managers’ Index (PMI) holds significance and has the potential to influence volatility. Should the data indicate that the contraction in January occurred at a slower pace than in previous months, the Euro might find some support. Consensus forecasts suggest a marginal improvement in manufacturing and services, although both remain in contraction territory. The outcome of the PMI data will likely impact the Euro’s performance in the immediate term.
The Dollar regained strength as it entered the new week, with robust US Retail Sales and Jobless Claims data prompting a reassessment of expectations for a Fed rate cut in March. Retail sales saw a notable increase of 0.6% in the previous month, driven by heightened activity in clothing and accessory stores. This data surpassed market forecasts, which had anticipated a more modest 0.4% rise. Concurrently, weekly Initial Jobless Claims recorded their lowest level in almost two years, indicating a tightening labour market.
The positive economic indicators contributed to a reduction in the perceived likelihood of an imminent Fed rate cut. The recent hawkish tone from Fed officials played a role in tempering expectations for aggressive rate cuts. Fed Governor Christopher Waller, in particular, shifted from a more dovish stance, emphasising that while inflation is approaching the c2.0% target, the Fed should exercise caution and avoid rushing into interest rate cuts until there is clear evidence of sustained lower inflation. This nuanced perspective added to the evolving narrative surrounding the Fed’s monetary policy stance.
This week’s data calendar in the US brings a significant lineup, including PMI figures set to release on Wednesday, aligning with similar releases from the UK and Eurozone. Additionally, Thursday brings the eagerly awaited Q4 2023 GDP figures, followed by Core Personal Consumption Expenditures due on Friday.
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.