A surprise increase in GDP (Gross Domestic Product) for November was the key release of last week for the UK. However, there were also signals from Bank of England’s Chief Economist, Huw Pill, that inflation risks might be beginning to turn, and the FCA (Financial Conduct Authority) warned that more than three quarters of a million households were at risk of defaulting on their mortgages due to higher mortgage finance costs and the squeeze on real incomes. Expectations of the peak in UK interest rates has fallen from above 4.7% at the beginning of 2023, to under 4.4% at the end of last week. 

GBP struggled for traction yet again last week. A move higher in GBPUSD was counterbalanced by moves lower in GBPEUR and GBPJPY. The pound may well continue to struggle for traction this week, in my view, with a data dump of labour market, consumer prices and retail sales figures all due. 

If the pound’s underperformance against other major currencies continues, it could only be a matter of time before its momentum against the USD turns sour again. Only some significant upside surprises in the UK data and surveys this week, or hawkish comments from Bank of England officials (although no major speeches are scheduled) could provide independent GBP strength. Otherwise, the pound will be hoping for ongoing bad news elsewhere, in my view.

The news from last week saw Euroland industrial production rise by 1% month-on-month in November. Whilst that news appears positive, it could be the last piece of the COVID hangover which interrupted supply chains and delayed production, working through. The news on orders from many Euroland economies has been far less encouraging and suggests a contraction in output from here on in. 

For the week ahead, the focus is likely to be on the January ZEW* survey from Germany. This has shown steady improvements in readings over the past few months, but are the low hanging fruit now picked on this survey? 

As for the euro, speeches at the World Economic Forum from a number of Governing Council members and the ECB (European Central Bank) President, Christine Lagarde, could help maintain the positive momentum, if the speakers remain committed to additional and substantial monetary tightening from here, as they have been in previous weeks. 

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

A slew of comments from US Federal Reserve officials last week indicated that the pace of monetary tightening from the Fed could slow again in February, with a majority of speakers indicating they favoured raising the targetted Fed Funds rate by only 25 basis points. 

Some of the worsening news from the US economy is likely responsible for this change of attitude, but also last week’s drop in headline and core consumer price inflation will have had a lot to do with things.  

This week’s retail sales and industrial production figures for December could increase the pressure on those arguing for larger hikes at the Federal Reserve, if the news is worse than the drop in sales values and industrial output already expected. For the USD, there has been no let-up in recent weakness, and this week may not be the week the USD turns, in my opinion. 

Last week’s central bank meetings from Romania, Serbia, Peru and South Korea all concluded with a 25 basis point tightening. Official interest rates in Romania stand at 7%, in Serbia at 5.25%, in Peru at 7.75% and in South Korea at 3.5%. None of this was a surprise to markets, but the pace of tightening is slowing as the cumulative effect of the hikes is beginning to take effect and as global inflation starts to slow.

Will the same be true of this week’s meetings in Japan, Malaysia, Indonesia, and Norway? The National Bank of Malaysia, Bank Indonesia and Norges Bank are all expected to hike by 25 basis points, albeit there is market uncertainty over whether the Norges Bank will hike this time around. However, the markets will be more interested in what the BoJ (Bank of Japan) does, not with its official interest rate, but with its yield curve control policy after December’s surprise move. Could the BoJ surprise again and prompt a further JPY rally?