GBP continued to weaken throughout the course of the day following those GDP numbers, confirming the UK fell into a recession in the second half of 2023. The drop in GDP saw Chancellor Jeremy Hunt inferring pressure on the Bank of England to pull the UK out of a recession. Hunt said in the afternoon that the “turning point” point in growth will come when inflation falls to 2%, and the BoE “feels it can bring down interest rates”. It would seem that the Governor Bailey could well be under some political pressure to cut rates ahead of the elections.
Staying on the political theme, Rishi Sunak and the Conservative party were dealt a blow with the Labour party winning the by-elections in Wellingborough and Kingswood. Whilst the UK elections are not an immediate focus for markets, as we know from the past, the election will likely cause volatility on GBP closer to the time. The Rishi Sunak administration has now accrued more by-election defeats in a single term of office than any government since the 1960’s.
USD took a hit in the afternoon after US retail sales disappointed, pointing to a monthly fall of 0.8% in January. Jobs data was positive, however jobless claims came in lower than expected.
Central bank speak overnight saw Fed Bostic put out a hawkish statement that he feels there is no rush to cut interest rates, whilst the job market and US economy remains strong. ECB’s Villeroy, in contrast, appeared to be more dovish who stated that the ECB should not wait too long to cut rates. EURUSD erased some of the gains seen over European trading hours.
* Daily move - against G10 rates at 7:30am, 16.02.24
** Indicative rates - interbank rates at 7:30am, 16.02.24
UK retails sales beat expectations, coming higher at 3.4% in January from a drop in sales of 3.2% in December. GBP is higher on the back of the data.
On the client side there seems to be growing interest from our GBP buyers, eyeing more attractive levels at which to sell foreign currencies back to GBP, following the drop in inflation and GDP this week, and on the basis that the BoE may well have their hands forced in cutting rates earlier than current expectations.
Producer price inflation is due for release this afternoon from the US, expected to show a decline to 0.6% from 1% year-on-year, but following on from this week's uptick in CPI numbers, we wouldn’t be surprised for an uptick in the PPI numbers which would bode well for USD gains.
US PPI will get more focus than usual today following the uptick in CPI seen earlier this week. Markets are expecting producer price inflation to rise to 0.1% in January, which would further support the notion that the slowdown in inflation is seemingly slowing. USD would be largely supported should this be the case.
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