UK Data Exceeds Estimates – Sterling Update

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 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.

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.