UK: Weekly FX Market Update 9 January

GBP

• The UK faces a variety of issues right now - Striking workers, low productivity (ONS data) and a precarious housing market – which neither the US or Europe have to deal with.

• The latest Halifax house price index data showed a decline in prices of 1.5% for last December, the fourth consecutive decline.

• GBPUSD was under pressure last week, hitting a low of 1.1845.

All eyes now turn to UK growth data with the UK GDP month on month rate set to be announced on Friday, currently expected to shrink by 0.3%.

Can the BoE continue to focus its policy around inflation and turn a blind eye to the potential recession that the UK already finds itself in?

EUR

• Retail sales rose by 0.8% in December and better than the 0.5% expected.

• EURUSD fell 2.5% last week before bouncing, as it priced in the possibility of a resolute, inflation fighting, Federal Reserve.

Headline Eurozone inflation was reported at a lower than expected 9.2%. However, core CPI was reported stronger than expected at 5.2%. Does this mean that the ECB will have to continue on its well-publicized path of interest rate hikes?

Could the euro continue to decline against the dollar, due to the interest rate differential, but at a slower pace than the pound?

USD

• The US$ index fell 12% Q4 2022. This was in response to the Fed only hiking 0.5% in December, rather than 0.75% as it had done at the previous three meetings.

• US Non-Farm Payrolls released last week showed 235k new jobs added to the economy and the unemployment rate falling to 3.5% from 3.7%.

• Later on Friday afternoon, ISM Services PMI shocked the market by falling to 49.6, well below the expected 55.0 mark.

The Federal Reserve has openly stated that the labour market is far too tight for their liking in their fight against inflation, and they do not want a wage price spiral. The latest job openings data showed 10.458 million job vacancies, with 5.5 million people unemployed and looking for work. Around a 2:1 ratio of jobs to workers.

Is the US$ set for a bounce in Q1 2023 and could it be helped by US strong jobs data and stubborn CPI?

Events for the weekend ahead:

Tue Jan 10

10:10 CAD BoC Gov Macklem/BoJ Gov Kuroda Speak

13:00 USD Fed Chair Powell Speaks

Wed Jan 11

00:30 AUD CPI/Retail Sales

Thu Jan 12

12:30 USD FOMC Harker Speaks

13:30 USD CPI

Fri Jan 13

07:00 GBP GDP/Goods Trade Balance/Industrial Production/Manufacturing Production

10:00 EUR Industrial Production/Trade Balance