17 February 2023

GBP

UK data has largely exceeded estimates of late, with stronger employment and (some) growth helping to banish the recent slew of pessimistic forecasts. The latest inflation data also reflected further softness, with headline inflation declining by 0.6% over the past month, having been expected to have dipped by 0.4%. That helped to bring the yearly print down to 10.1%, from 10.5% previously. There was also a beat on the Core data, slipping back below 6% (5.8%) on a yearly basis. Similar gains were to be had for Producer Price Inflation (PPI). Whilst inflation still remains frothy, the steady declines may help to determine a shallower path for rate hikes from the BoE, given the delicate UK economic outlook. This (Friday) morning has also seen the release of the latest UK Retail Sales data, and having declined by 1% (MoM) previously, there was a decent bounce back of 0.5% during January, ahead of a 0.3% gain expected.

On the political front, the sudden and unexpected resignation of Scotland’s first minister, Nicola Sturgeon this week, puts some obvious strains on Scotland’s independence movement, and leaves a vacuum in her party, given her longevity and a lack of obvious replacements. However, the news did not impact the pound, which has had an interesting week. GBP/USD had initially rallied back from 1.2000 to over 1.2250 on the back of those stronger than expected UK data releases, however, the powerful combination of a super-strong dollar (see USD) and softer UK inflation, helped to drag the pair to back below 1.2000 toward the end of the week.

Amongst key data released in the UK next week, the latest S&P Global/CIPS Services PMI will be the one to watch, with the latest estimates calling for a drop to 48.3 from 48.7.

Thoughts from the dealing desk

-Jon Camenzuli, Corporate Dealer

EUR

Much the same as the pound, the single currency has had a sideways and slightly less volatile backdrop for the most part, with EUR/USD remaining +/-100pips of 1.0700 throughout the week. Stronger than expected regional employment data further highlighted improving conditions, with a 1.5% yearly increase amongst headline payroll gains. Regional growth data also matched the preliminary reading, rising by 0.1% in the final quarter of last year, and marking an overall increase of 1.9% (YoY).

On the downside, the latest Industrial Production figures missed, slipping by 1.1% through December, and 1.7% on a yearly basis. Markets had been expecting declines of around 0.8 and 0.7% respectively. In her latest speech, ECB head Christine Lagarde reiterated her desire to raise rates by 0.5% at the forthcoming ECB meeting, but the ‘news’ had little impact on the single currency, given that markets have understandably remained far more fixated on what the ECB will be doing after this meeting. This came after Lagarde’s previous suggestion that the ECB will be monitoring the impact of the cumulative rates hikes on the regional economy, before deciding on their next move. It is also fair to say that data throughout the region has probably been softer of late, which has coincided with broader increases in energy prices. Not the best of combinations.

Amongst the key data releases next week will be the latest regional inflation readings, as well as the latest regional and German ZEW surveys. As for that single currency, well in the long-run analysts still remain optimistic on the single currency, however, the resurgent greenback and rising expectations for future Fed rate hikes, makes the outlook for EUR/USD now look more uncertain. GBP/EUR has drifted between 1.1200 and 1.1300 for the most part, lacking clear directional bias.

USD

The US economy continues to defy expectations at every level. Following on from those super-sized payroll (500K+) gains, this week has seen another blockbuster report in the shape of the latest Retail Sales data, with 3% gains over the past month, marking a two-year high in the data and highlighting a resurgent consumer. The latest inflation reports have also helped to question any meaningful slowdown, or at least any rapid declines amongst inflation, with Headline CPI rising by 0.5% over the past month (6.4% YoY) and Core CPI jumping by 0.4% (5.6% YoY). Markets had been expecting/hoping for a more material reduction. With energy prices also rising, PPI inflation also jumped by 0.7% over the past month (0.4% exp).

Having previously expected to see perhaps one further rate hike from the Fed before a pause, markets now think that there will be at least two more hikes, with the chances of a dreaded return to 50bps hikes now firmly back on the table. The Fed’s Mester (non-voting) alluded to the possibility just yesterday. The chances of any rate cut this year also look to have completely evaporated, barring any unexpected turnaround in the US economy. Indeed, markets have now been openly debating whether the economy will be slowing at all, given just how strong the data has been of late. So, we have gone from a ‘hard’ to ‘soft’ to no landing whatsoever in the space of a few months.

Markets themselves have been somewhat disjointed this week, with high volatility at times, especially after the inflation data. Higher yields dominated at the front-end, as the Bond market priced in the prospect of a higher terminal rate from the Fed, however, equity markets initially rallied by some margin, before succumbing to selling pressures after the surging PPI data yesterday.

The news has also understandably helped to fuel a strong dollar rally throughout the week, with the dollar index now surging beyond 104.00 for the first time since the beginning of the year. The dollar has made some strong gains elsewhere across the board, with USD/JPY moving beyond 134.75, despite the yield on the Japanese 10-year JGB remaining firmly over the BoJ’s ceiling of 0.5% for most of this week.

Next week sees the release of the latest US growth data, with preliminary Q4 GDP data due. Early estimates predict a healthy 2.9% jump, given the strong inputs recently. The latest Core personal Consumptions Expenditures data is also set for release later in the week, coupled with the minutes from the last FOMC meeting.

CAD

The Loonie has bucked the trend against the strengthening greenback for the majority of this week. Partly helping to underpin the Loonie have been energy prices, with oil rising by a whopping 10% since the beginning of the month. In Canada, strong labor data, with headline payroll gains of 150k and the jobless rate holding steady at 5%, have also helped to question whether the BoC will ultimately be able to maintain their famous pause in rate hikes, given the underlying strength in the economy.

The latest Canadian inflation data, which is set for release next week, will inject some added spice into proceedings. Markets currently expect a slight increase in the key yearly core print from 5.4 to 5.5%. At the same time, Retail Sales (for Dec) are also due. If both numbers exceed estimates, then the pressure on the BoC will no doubt intensify. Back to that Loonie, and USD/CAD has remained trapped within a 1.3300 – 1.3500 range for another week, although the pair is currently attempting to confirm a breakout to the topside. However, the broader Loonie has fared much better, with GBP/CAD moving from above 1.6600, to below 1.6150 since the beginning of the year.

AUD & NZD

Another weaker than expected Australian employment report surprised markets at the end of this week, with net employment falling by 11.5k in January, having also declined by around 20k in the previous month. Markets had been expecting a rise of around 20k in January. The overall unemployment rate also increased from 3.5 to 3.7%, with hours worked dropping by 2.1%. That decline was primarily due to more workers being on holiday, and why not given the lovely January weather in Australia. In other news, consumer inflation expectations dropped over the past month from 5.6 to 5.1%.

The RBNZ meeting comes into focus next week, with the potential of another 50bps rate hike, which would take New Zealand interest rates up to 4.5%. However, beyond next week’s meeting, the picture remains far cloudier, given a slowing housing market and softening inflation.

Both the AUD/USD and NZD/USD have finished roughly where they started the week, with the former rising briefly over 0.7000, before falling back to 0.6840, and the latter rising towards 0.6400, before declining to back under 0.6270.