Forex Trading Library

UK Data Barrage and Pound Reaction

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The GBPUSD has been relatively quiet on the fundamentals front, allowing technical traders a respite from the news. But the rest of the week will feature a series of key market-moving data points just ahead of the European trading session. With markets still trying to figure out what the BOE will do over the coming months, the direction of the UK economy is especially important.

Among the couple dozen data points coming out, the ones that are most likely to have an impact on the markets are unemployment figures to be released tomorrow. Then there is inflation data coming out on Wednesday, followed by retail sales figures on Friday. The latter has taken on new relevance lately as investors question whether consumers will maintain demand and therefore inflation.

What to Look Out For

The BOE has repeatedly warned that a recession could happen, which means that the officials on Threadneedle street are eager to see conditions that would allow rate cuts. That is a reduction in inflation, first and foremost. But the consensus at the Bank of England is that higher wages have kept inflation hot for longer than in other comparable economies. Those wages are supported by tightness in the labor market.

While the unemployment rate has been slowly ticking higher, the BOE apparently thinks that it hasn’t gone far enough yet. So, if the jobs numbers come in more resilient than expected, it could prop up the pound. The UK is expected to have added 80K jobs in November, an increase over the 50K reported previously, suggesting that the labor market remains dynamic. Meanwhile, the unemployment rate is expected to tick up to 4.3% from 4.2% prior.

Slowing Price Hikes

The highlight of the week for sterling is likely to be the release of CPI change, which is expected to come down to 3.7% from 3.9% prior. While still high by pre-pandemic measures, this would put it back within range of other developed economies. But just no longer being the outlier might not be enough to convince the BOE to give up on the possibility of tightening.

The core inflation rate rate is expected to still remain even higher, coming down to 4.8% from 5.1% prior. Some economists speculate that the UK could see a faster drop in inflation than other major economies in the coming months. But that’s based on a supposition that the UK economy will underperform, and the country will slip into a recession at the start of this year. Which is why the jobs number and retail sales number can cushion or exacerbate the reaction to the inflation figures.

UK Retail Sales After Disappointing Christmas Trading

So far, the UK economy has provided mixed signals about where it’s going. The November GDP figure was better than expected, but UK shoppers appeared to be worse hit by the cost-of-living crisis as they doubled down on bargains for Christmas shopping. That decline in demand might be reflected in the retail sales figures, which are expected to show a monthly drop of -0.3% compared to +1.3% growth in the prior month.

The market is likely anticipating disappointing results in the retail sales data, so a beat could provide further upside for the pound than a miss. Markets appear to be more inclined to expect data pointing towards a recession for the moment, which could leave more risk of a surprise to the upside following data releases.

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