Recession fears trouble markets – Sterling Update

GBP

It has been a fairly solid week for UK data and the pound, with GBP/USD moving within touching distance of the December high at 1.2447, before slipping back towards 1.2300 amidst a broader market decline. Sterling also marked some worthy gains against the likes of the EUR, CAD and JPY during that time, confirming a much stronger performance for the pound when measured against a broader basket of currencies.

This week’s key UK data releases have mostly helped to underpin the move, with inflation declining for the second month in a row, amidst headline inflation dipping to 10.6% (YoY). Core inflation slipped from 6.6 to 6.3% (YoY) through December. The latest UK unemployment report also highlighted ongoing robustness in the labour market, with the overall ILO unemployment rate remaining at a healthy 3.7%, news which will give the government some relief, given such a weak outlook for all things UK recently.

Although perhaps unexpected, given that the BoE have now raised their policy rate to 3.5%, UK house prices reported their first monthly fall in more than a year, dipping by 0.3% through November. Whilst that may represent the first such drop since late 2021, it helped to drag the overall annual growth rate down from 12.4 to 10.3%. Interestingly enough, London reported the weakest region-wide annual pace of house growth, at 6.3%, which does not bode well for the rest of the UK, which tends to lag London.

The latest Retail Sales for the UK have just been released this morning (Friday), and having declined by 0.4% in November, markets had expected a rebound through December, however, the latest figures highlighted an unexpected further decline of 1% (MoM/Dec), with a 5.8% drop over the past year, clearly reflecting the impact of those big increases to the cost of living for UK consumers.

Looking ahead, GBP/USD will need to break over 1.2450 to signal likely further upside gains, a move which may be dictated by broader dollar sentiment in the short-run, given the lack of keynote UK data releases scheduled for release next week.

EUR

It has been another solid week for Euro area data. German Inflation softened (again) over the past month, slipping by 1.2% throughout December, a trend which is reflective throughout the region. The latest ZEW survey also highlighted that German investor sentiment has now turned positive for the first time since Russia’s invasion of Ukraine. The ZEW’s indicator of investors’ expectations over the coming six months, rose for the fourth month in a row from -23.3 to 16.9. Markets had been expecting a -15 print. That is some improvement.

With the trend of ever-improving data (against expectations) continuing throughout the region, there have been increasing concerns amongst investors that the ECB might be inclined to soften their language, and imply a shallower pace of hikes moving forward. However, that has certainly not been the case, with ECB President Christine Lagarde, speaking in snowy Davos, suggesting that the ECB will ‘stay the course’ with rate hikes. Whilst she did highlight that economic news has become more positive, and that Europe may now only see a small contraction, the fact that she remains resolute on hikes will give markets confidence, which could help to support the single currency moving forward. Lagarde has been backed by a splattering of ECB officials,  implying that the ECB will deliver further 50bps rate hikes over the coming months.

On that note, EUR/USD has remained airborne, without being able to break above 1.0875, which has marked the top for the pair on several occasions, although any dips have been met by worthy buyers. GBP/EUR has not fared as well, rallying back above 1.1450, backed by a resurgent pound (see GBP).