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UK inflation figures headlined a busy day in economic news. Editorial credit: Richard M Lee via Shutterstock
Sterling shot up this morning as news broke of an unexpected rebound to UK inflation. Having lost over a cent to the US dollar yesterday, GBP/USD retraced almost a third of Tuesday’s losses in early morning trading.
The US dollar continued to benefit from a conservative tone in financial markets, gaining ground on the pound and the euro in Tuesday’s session. EUR/USD lost over a cent yesterday and is now trading at its lowest level in over a month.
This morning’s inflation figures out of the UK showed a surprise increase to the headline and core numbers. Headline inflation increased from 3.9% to 4% in December, while core inflation beat forecasts of 4.9% to reach 5.1%.
Experts had predicted a modest dip to both measures, and momentum seemed to be building in this regard after a rapid fall in pay growth.
The news will come as a blow to UK markets, which have started to feel more optimistic about the outlook for 2024. Accelerating inflationary forces increases the chance that the Bank of England will favour patience as it looks to normalise interest rates.
More key reads are due out of the eurozone today, where inflation is expected to rebound to 2.9% in December’s final read, up from 2.4% in November. December’s US retail sales then follow in a busy slate.
As more negative news about the situation in the Middle East poured in, the US dollar strengthened owing to its status as a safe-haven for jittery investors. The Israeli shekel fell by over 1% against the US dollar to open the week, just one of a number of relative gains for the currency.
China’s GDP growth rate in the fourth quarter of 2023 reached 5.2%, despite troubles in its housing sector and shifting demographics. China’s population fell by over two million people last year, the third year in a row it has fallen.
Donald Trump has won the Iowa caucus – a small but symbolically significant step on his quest to secure the Republican nomination for president. Trump is projected to cruise to victory in the upcoming primaries, even as main rivals Nikki Haley and Ron DeSantis have begun to ramp up attacks on him.
Things are getting stickier for UK prime minister Rishi Sunak, whose Rwanda immigration bill is meeting stiff resistance from the right wing of the Tory party.
And finally, it’s that special time of year regular folk have circled in their calendars: yep, it’s Davos! The world’s high and mighty gather in the Swiss mountains to discuss a long list of global problems, and optimism seems to be in short supply. Geopolitics, the economy and AI are all on the agenda, although many heads of state have opted to duck out of attending.
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GBP: Wage growth moderates
GBP/USD lost over a cent on another bruising day for the pound, although sterling rallied this morning and GBP/EUR was little changed.
The pace of average UK wage growth slowed to 6.5% in November from 7.2% the month prior. The Bank of England are said to view this metric as a key component of their strategy to combat inflation, although policymakers believe wage growth should not exceed 3% to keep inflation in check.
GBP/USD: the past year
EUR: Germans still hopeful
The euro continued to cede value to the US dollar while trading broadly flat against the pound.
Despite yesterday’s disappointing GDP outcome, German consumers are starting to feel better about things. At least that’s what the influential ZEW Economic Sentiment Index reported, which rose higher than expected to 15.2 compared to December’s 12.8.
USD: Retail sales benchmark
The US dollar had another strong session, shooting upwards against its major rivals on the back of geopolitical uncertainty in the Middle East.
There hasn’t been much US data to sink our teeth into this week, but that changes with December’s retail sales out today. Forecasts are expecting a mild bounce, but the predicted 0.3% to 0.4% growth won’t set pulses racing if it comes to pass.
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