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The pound finished last week strong as new data cast doubt on future interest rate cuts.
Sterling enjoyed a strong end to last week, climbing by 1% against the US dollar over the course of Friday. EUR/USD rose to its highest level this year as GBP/EUR strengthened slightly in a more balanced session.
January’s preliminary data from the S&P UK PMI report indicated increased activity in both the manufacturing and services sectors. However, the really eye-catching news was that UK private sector firms were increasing prices at their fastest rate in 18 months.
This puts the Bank of England (BoE) in a tough position. Economic growth has stalled in recent months, which has helped build the narrative around imminent rate cuts. However, Governor Andrew Bailey and co will be reluctant to announce a further cut if they aren’t convinced that price pressures have subsided. The next interest rate meeting on 6 February will be closely watched.
Manufacturing PMI (as measured in the Hamburg Commercial Bank study) was also on the rise in Germany and across Europe. Those numbers came with the suspicion that some manufacturers were frontloading orders in anticipation of trade tariffs. The coming months should give us more clarity on whether that is true.
In the US, the number of existing houses sold in December rose to an annualised rate of 4.24mn, a few thousand more than had been expected. The latest finds the home sales sector expanding at its fastest pace since February.
This week sees several high-profile economic releases as well as the latest interest rate decisions from the European Central Bank and the Federal Reserve. Markets will be turning their attention to a slew of European GDP data, German inflation as well as US durable goods orders and core PCE price increases – the Federal Reserve’s go-to inflation measurement.
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GBP: Crunch time for BoE
Friday’s mixed data raised the stakes for the Bank of England. Markets still believe it will opt to cut rates but that decision has been made a lot less certain. Sterling will be bracing for volatility ahead of the decision next week.
GBP/USD: the past year
EUR: Markets expect another cut
Currency markets expect the European Central Bank to opt for another 0.25% cut to interest rates at its meeting on Thursday. This is based on some recent comments from Christine Lagarde as well as the sense that the ECB will continue to be aggressive to combat weak growth.
GBP/EUR: the past year
USD: Rare pressure from mixed data
Falling services PMI helped European currencies advance at the expense of the US dollar on Friday. After a prolonged spell of strength, last week ended with a more balanced tone than the giddy mania that has been pervasive since the election.
EUR/USD: the past year
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