The first few weeks of the year have seen the British Pound experience a significant decline in value against both the USD and the EUR. Considering the highs observed in the pound-dollar exchange rate last September, the drop has been substantial, with a loss of nearly 10% over this period. Much of this decline can be attributed to unfavourable borrowing figures from the UK and comments from the Bank of England, which indicated that the Autumn budget had effectively brought the UK economy to a standstill. This week saw the release of several key economic data points that influenced market movements.
The week began with Producer Price Index (PPI) data from the US, which came in below expectations. Core PPI recorded a 0.0% change compared to forecasts of 0.2%, while the broader measure, expected at 0.4%, came in at 0.2%. The market impact of this data was limited, but the Pound managed to make modest gains, briefly halting its prior downward trend.
Inflation data followed from both the UK and the US. UK Consumer Price Index (CPI) was expected to hold steady at 2.6% but instead came in slightly lower at 2.5%. Although this deviation was marginal, it increased the likelihood of an interest rate cut by the Bank of England, with forecasts of a cut rising from 66% to over 80%. In the US, CPI data matched forecasts, with year-on-year inflation at 2.9% and month-on-month inflation at 0.4%. The only surprise came from the Core CPI, which was slightly below expectations. These developments briefly pushed the Pound to its highest level for the week.
Midweek, the UK released its latest growth figures. While these figures confirmed a return to positive territory following two consecutive months of economic contraction, the growth rate of 0.1% fell short of the forecasted 0.2%. As a result, the Pound surrendered the gains it had made earlier in the week. Later, US Retail Sales data provided some respite for the Pound. Both the core and full readings came in below expectations—core retail sales were forecasted at 0.5% but recorded 0.4%, while full retail sales, expected at 0.6%, also came in at 0.4%. This gave the Pound some momentum against the Dollar.
However, the optimism was short-lived. Dismal UK Retail Sales figures released this morning showed a contraction of 0.3%, starkly missing the forecasted uptick of 0.4%. This resulted in renewed pressure on the Pound.
Looking ahead, next week’s markets will likely be dominated by the inauguration of the US President Trump’s return to the White House, with expectations of significant market volatility. Another key focus will be the release of Purchasing Managers’ Index (PMI) data for the UK, US, and Eurozone, scheduled for Friday.
