As mentioned in yesterday's report, markets began the day in a calmer state and this continued through Thursday's trading session with equities trading higher and enabling GBP to continue to eke out gains. GBPEUR looks set to test the highs seen in December. US initial jobless claims came in lower and underscored the improvement in the US job market, causing 10-year treasury yields to climb higher to 4.14%, the highest since mid-December. USD reversed losses seen earlier in the day.
* Daily move - against G10 rates at 7:30am, 19.01.24
** Indicative rates - interbank rates at 7:30am, 19.01.24
UK retail sales this morning fell at their fastest pace in three years, adding to the risk that the economy slid into a recession in the second half of 2023. The reading came in at -3.2% versus an expected -0.5%, and the data will mean that sales dropped by 0.9% in Q4 of 2023, and will shave of 0.04% off the GDP number in the same period. Earlier in the week we had a surprise with an upshot in inflation in December, and combining the two data points together highlights a big problem for the BoE to manage of poor growth with sticky inflation. Market pricing on a rate cut still suggests May, but any further data adding to stagflation concerns could well bring this date forward and would not bode well for GBP. GBP is down across the board to start this Friday morning.
USD is poised for its third consecutive weekly gain as markets have eased the amount of rate cuts expected this year, driving treasury yields higher. A higher sentiment print from the University of Michigan and further pushback on rate cuts from Fed speakers will likely add to additional USD gains.
The buoyancy for GBP this week was dealt a blow this morning after UK retail sales fell at their fastest pace in three years. The data points to a further likelihood that the UK fell into a recession last year, and will also put the BoE in a tricky spot as they deal with an economy that is illustrating poor growth with the threat that inflation may well be sticky. Markets are, as we know, forward thinking, so data points will be in close focus to see if the threat of stagflation grows further or not. In an election year, this does not bode well for PM Rishi Sunak and nor does it for importers selling GBP to buy foreign currency.
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