Currency Note

Sterling sinks despite UK economic gloom lifting

By Christopher Nye February 17th, 2023

After a lively week for sterling versus both the euro and US dollar, the pound ends the week roughly 1% down on both compared to Monday morning. However, that was after strengthening in the early part of the week, making the losses in the latter part of the week seem more pronounced.

The latest prompt for sterling weakness has been retail sales bouncing back. This morning’s data shows 0.5% more sales than December, much against market expectations. However, sterling has also been shaded by new expectations from the US that the Fed’s next interest rate rise could be 50 basis points rather than 25, as underlying inflation continues.

There has been plenty of economic data released over the course of this week for investors to digest, most of it positive for the UK economy. That includes inflation down, recession possibly avoided, earnings rising, unemployment claims falling, and now shoppers still shopping.

The picture of London’s stock markets looked more optimistic too. Equities in London gained for a fourth consecutive session yesterday, with the benchmark FTSE 100 climbing to a fresh record above the 8,000 mark. Its advances were largely driven by gains in the technology, energy and materials sectors.

In business news, Britain’s biggest energy supplier and owner of British Gas, Centrica revealed it made record profits of more than £3.3bn last year.

On the data front, it is a quiet day today and for the majority of next week for the UK.

Initial jobless claims and PPI in the US gave us an insight into the country’s economy yesterday. The number of people filing for unemployment fell slightly (to 194,000) while producer prices for final demand shocked markets after increasing 0.7% month-over-month in January. This marked the biggest increase in seven months.

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GBP: Retail sales improve

Sterling has had a difficult two days, falling by close to 3% from its peak on Tuesday against the US dollar and close to 1.5% against the euro. The reason has been the better inflation figures, which have reduced the need for the Bank of England to keep on raising interest rates.

We’ve just seen the latest retail sales figures for the United Kingdom which have revealed a 0.5% increase in January compared to December. According to the Office for National Statistics (ONS), retail sales have been especially high for online retailers. However, the ONS’s Director of Economic Statistics Darren Morgan warned that “The general trend remains one of decline.”

Next week is a quieter one for data, with PMI the main event midweek and GfK Consumer Confidence on Friday.

GBP/USD over the past year

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EUR: Euro falls following US data

The single currency strengthened against most currencies yesterday, apart from the US dollar, where February’s disappointing performance has continued.

After hitting a 10-month high in early February the trend has been largely downhill and that accelerated yesterday. This comes after increased expectations from the US side of the equation that the Federal Reserve will adhere to its hawkish monetary policy for longer following the latest PPI data which highlighted that price pressures remain elevated in the US.

In the eurozone, markets have just seen a final reading for French inflation coming in a 7% for the year to January.

Next week starts slowly for data but there will be the ZEW Economic Sentiment reading for Germany on Tuesday, along with a mass of PMI data from across the eurozone.

USD: Hawkish noises boost dollar

The US dollar strengthened across the board yesterday, while stocks fell. It followed warnings from policymakers that strong rate rises will continue, potentially with a 50 basis point rise at the next FOMC meeting rather than the predicted 25.

The Dow Jones fell 300 points in early deals on Thursday, while the S&P 500 and Nasdaq 100 were down around 0.7% each, as economic data heightened concerns about hawkish central bank policies.

Today investors will be listening closely to the CEO of the Federal Reserve Bank of Richmond, Thomas Barkin, who will speak on inflation later today.

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