Sterling remains well supported

GBP

Last week the pound remained well supported against both the USD and EUR as we headed into the weekend.

Sterling surged more than 4.3% off the December 2021 low against the dollar and approached two year highs against the euro. Strength against the dollar came after the release of extremely disappointing US retail sales data on Friday. With the market forecasting US retail sales at 0% and core sales at -2.3%, last week’s releases largely missed expectations. US retail sales (m/m) and core retail sales (m/m) came in at -1.9% and -2.3% respectively.

Adding the GBP strength, the latest UK GDP data came in better than expected. A reading of 0.9% from a previous 0.4% shows the UK economy growing in strength at a steady pace.

With the Bank of England and interest rates now in focus, this week’s inflation data will be key. Wednesday sees the release of UK CPI data. The markets expects a reading of 5.2%, up from a previous 5.1%. At present, the market prices in a 25BP rate hike at February’s meeting. With Bank of England Governor Bailey speaking shortly after Wednesday’s inflation reading, it will be interesting to see how the governor digests the data and ultimately how this impacts monetary policy decisions. If the reading misses expectations, it could lead to a delay in hiking rates which could see the pound weaken.

While we expect sterling strength to continue, current UK political unrest may dampen ongoing sentiment. ‘Party Gate’ has taken over headlines in recent weeks. With further parties and cabinet gatherings being reported, there is now growing pressure on the Prime Minister to resign, including pressure from a sizable number of conservatives MP’s. Typically political unrest results in a currency’s weakness as it leads to uncertainty. However, this doesn’t seem to be the case thus far for the pound. It certainly is a topic that should be closely watched over the coming days.

Key announcements

Unemployment rate (expected 4.2%, previous 4.2%)
Claimant count change (expected -38.6k , previous -49.8k)