The UK CPI, Jobs and Future for BOE

Markets are gearing up for two major UK data releases this week, with the UK CPI and jobs report set to influence the pound’s direction. Cable has been trending lower for about a month now, as markets move to price in more easing from the BOE. Last week’s better than expected GDP numbers didn’t give the currency all that much of a boost, so now the focus is on inflation numbers.

As a sign of the market’s sentiment, it’s worth noting that the UK’s premier blue chip stock index, the FTSE 100, has been on a winning streak lately. Last week, it scored three consecutive new all-time highs. Part of that was buoyed by higher corporate profits. But also analysts point to the weaker pound as support for the index. The implication is that many traders expect the pound to underperform at least in the near term. Typically, the stock market and the currency move in opposite directions as traders move money between stocks and bonds. If investors are betting that the FTSE 100 will rise, by implication they are betting that the pound will remain weak.

The Data That Didn’t Move the Markets

Traders were surprised on Friday when the UK unexpectedly reported 0.1% growth in its Q4 GDP, above the -0.1% contraction that had been forecast. While this is generally good news for the economy, the underlying data left investors largely unmoved. The surprise bump in consumer spending in December was seen as pushing up the GDP number at the last moment, and with weakening private investment, economists worry the growth won’t last.

But, even if the economy isn’t in the best of shape, the BOE would likely still have to keep rates up if inflation doesn’t come down. The consensus has been that inflation in the UK will pick up through the course of the winter, and then cool down through the course of the year. This supports the idea that the Bank of England will keep cutting rates. But, if inflation were to show signs that it’s not going to turn around, then the pound could gather some strength.

The Big Obstacle

Tuesday sees the release of UK jobs data, which is important for gauging inflationary pressure. The unemployment rate is expected to remain unchanged at 4.4%, with the average earnings growing at 5.9% rate. That’s faster than the 5.6% reported previously, and growth in this sector could keep the market worried that inflation isn’t going away. On the other hand, under performance in wage growth could mean that one of the main obstacles for lowering rates is being cleared away, which could weaken sterling.

Then Wednesday sees a plethora of inflation data, but markets are likely to focus on the annual headline UK CPI rate, which is expected to accelerate to 2.7% from 2.5% prior. That, and the core rate, which is also seen rising to 3.5% from 3.2% prior.

The Potential Market Reaction

Those higher readings might not spook the market, because they are expected, but also are seen as the result of base effects. That is, a smaller inflation number from last year is rolling off. On closer inspection, the monthly core inflation rate is expected to be severely deflationary at -0.7% compared to 0.3% prior. If that trend is maintained, then it would suggest that the tide is shifting towards lower rates.

However, if monthly inflation remains high, particularly in the core reading, the markets could interpret as a sign that the dovish shift in the BOE was a bit premature. That could end up reversing some of the pound’s gains.

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