GBP

The pound suffered towards the end of the week after a second policy maker joined Bank of England Governor Mark Carney in signalling a potential interest rate cut. Policymaker Tenreyro said she would be behind an interest rate cut if growth in the UK does not pick up in the coming months, fuelling speculation that the Bank of England may be considering additional stimulus to the economy.

This, in tandem with the uncertainty around the future trade relationship with the EU, means that the pound is being kept lower for the time being. British lawmakers approved legislation on Thursday that will allow Britain to leave the European Union on 31st January with an exit deal, however this was expected given the Conservative landslide victory in December.

Key Announcements

None.

GBP

Sterling edged up on Thursday, hitting its highest level of the week as investors paused their ramping-up of bets on the Bank of England cutting interest rates later this month.

GBP fell sharply earlier this week after another Bank of England Policymaker said he would vote for a rate cut unless economic data improved significantly. Weaker inflation data on Wednesday added to sterling’s woes.

Traders are now preparing for December's retail sales data due on Friday, followed by the Purchasing Managers’ Index (PMI) surveys next week. Evidence that the economy failed to improve after the general election on 12th December will likely raise expectations for a rate cut and knock sterling lower.

Also weighing on sterling sentiment are worries about Britain’s ability to clinch a post-Brexit trade deal with the European Union, following their divorce at the end of this month. Prime Minister Boris Johnson has said 31st December 2020 is a hard deadline for the end of a transition period to negotiate the deal. Many observers say the timeline is too ambitious and risks leaving the UK without an EU trade arrangement at all.

USD

Major currencies mostly shrugged off the signing of the 'Phase 1' trade deal between the United States and China on Thursday. Most of the issues agreed upon had been expected and the threat of tariffs was not eliminated.

Beijing and Washington touted the 'Phase 1' deal, signed late on Wednesday at the White House, as a step forward in resolving their trade dispute. US Vice President Mike Pence said 'Phase 2' discussions had already begun.

Market enthusiasm was checked, because much of the agreement was priced in and it addressed few of the issues that led to the conflict in the first place.

Key Announcements

09.00 – GBP: Retail Sales MoM; Forecast at 0.5% against previous of -0.6%.

GBP

Weak inflation sent the pound lower on Wednesday, adding further weight to the speculation surrounding a potential interest rate cut at the Bank of England’s January meeting. UK Inflation rose at its weakest rate in three years coming in at 1.3% for December, falling below expectations of a 1.5% rise.

This figure brought more pressure to the pound, having fallen in recent days after several Bank of England policymakers have hinted at the possible need for an interest cut at the next policy meeting. Expectations increased earlier in the week following poor growth figures and slow industrial production.

Before the inflation figure announcement, another Bank of England interest rate setter backed a cut. Michael Saunders said that borrowing costs should be cut because of the weakness in Britain’s labour market.

Key Announcements

12:30 – EUR: ECB Monetary Policy Meeting Accounts.
13:30 – USD: Retail Sales; expected to increase to 0.4% from previous 0.1%.

USD

The dollar remained stable after US consumer prices rose slightly in December and monthly underlying inflation pressures retreated. This could allow the Federal Reserve to keep interest rates unchanged through this year.

On Tuesday, the Labor Department said its Consumer Price Index increased by 0.2% last month and was held back by declines in the costs of used cars and trucks, airline tickets, household furnishing and operations.

Last month, the US Central Bank left interest rates steady and signalled that the monetary policy could remain on hold this year after it reduced borrowing costs three times in 2019.

GBP

Yesterday, sterling fell to a seven week-low against the euro and a new 2020 low versus the dollar as investors worried about the state of the economy, speculating that it would lead the Bank of England to cut interest rates this month.

The pound has struggled of late after another Bank of England Policymaker had said he would vote for a rate cut later this month, unless economic data improved significantly. Money markets are now pricing in a close to 50% chance for a 25 basis point cut to rates from the current level of 0.75%, up from around a 20% chance on Friday.

The pound is also struggling due to concerns about Britain’s ability to agree to a trade deal with the European Union before the end of the Brexit transition period. Prime Minister Boris Johnson has said the transition period must conclude at the end of 2020.

Key Announcements

10:30 – GBP: Consumer Pricing Index (YoY) (Dec); expected to remain at 1.5%.

GBP

Sterling lost ground against EUR and USD on Monday as expectations of an interest rate cut grew, following a slowdown in growth for the UK economy. The latest UK GDP growth reading year on year showed the economy grew by 0.6%, its weakest rate of expansion since June 2012. Monday’s poor data release is of particular importance for GBP, as UK data remains under the microscope following recent comments from Bank of England policymakers. Policymakers have commented that UK data will be monitored to determine the next appropriate policy move.

Bank of England Governor Mark Carney and Policymaker Tenreyro were joined by Vlieghe as the latest policymaker to back a rate cut. Vlieghe stated that he would vote to cut the cost of borrowing for the first time since 2016 if economic data continues to disappoint this month. Vlieghe added that 'the next few meetings are absolutely live' and that 'an imminent and significant improvement in UK data is needed to justify waiting a bit longer'. This follows Tenreyro's comments on Friday, where she told a Westminster conference she could support a rate cut in the coming months. Tenreyro added that she would support a cut in the 'near term' should uncertainty over a post-Brexit UK-EU trade deal persist.

This is an important development for the GBP as policymakers voted 7-2 to keep rates on hold at the last MPC meeting in December, with only Haskell and Saunders voting to support a rate cut. Should Vlieghe and Tenreyro join Haskell and Saunders, they would only be 1 member short of a majority for a cut. Money markets are now pricing a cut by the end of January at 50% and an 85% probability of a cut by May.

Key Announcements

13:30 – USD: Consumer Price Index ex Food & Energy (YoY) (Dec) – expected to meet expectations of 0.2%.