• Joel

GBP Spikes On Strong UK Inflation Data

GBP spiked in the immediate aftermath of this morning’s solid UK January inflation data.

The headline came in at 1.8%, well above expectations for 1.6% and a nice improvement on December’s 1.3% reading. Markets had foreseen a solid rebound, due to rising energy prices, but this release certainly comes as a pleasant surprise. The Bank of England will be particularly pleased, as inflation is just 0.2% shy of their 2% target, compared to 0.7% below it back in December.

More broadly, today’s inflation data is the latest addition to a string of strong UK data points. Yesterday, we had a decent jobs report, which indicated that the UK labour market ended 2019 on a firm footing. We have also seen an impressive rebound in PMI business survey data this year, alongside a bounce in house prices. Clearly then, the UK economy has received a boost by a reduction in political uncertainty following Johnson’s emphatic general election victory in mid-December.

Further insight into how the post-election economic rebound is going is due tomorrow, when we get January retail sales data, and on Friday when we get February PMI data. Both are expected improve, in line with the broader economic trend, although Friday’s PMIs may show some weakness on coronavirus concerns.

How does the BoE see all of this?

The BoE is sitting pretty. They opened the door to a potential rate cut back in their January meeting, but only if the economy failed to rebound in line with their forecasts. As the economy appears to have done just that (rebounded in line with their forecasts), it is hard to see the BoE contemplating easing anytime soon (let's see if coronavirus Armageddon changes this!)

Moreover, as if the BoE needed any more reason to keep their powder dry, it looks as though increased UK fiscal stimulus is on the horizon. As a reminder, Rishi Sunak replaced Sajid Javid as Chancellor of the Exchequer last week. He is expected to play along with Johnson’s more pro-growth (and higher-debt) spending plans.

Will improving data and a BoE content to sit on the sidelines for the foreseeable future translate into a long-term GBP rally?

Under normal circumstances, yes. But as we continually note, EU/UK trade negotiations on the future relationship are an ever-present downside risk.

Indeed, this morning’s move higher in GBP was quickly faded by markets; after spiking as high as 1.3025, GBPUSD quickly moved back towards this morning’s 1.2980ish lows.

No fresh news prompted the move, which leads me to think market sentiment towards GBP is still fragile in wake of that FT report earlier this morning which essentially said the EU will be digging in their heels in negotiations with the UK.

As a reminder; the article stated that EU nations are preparing to toughen conditions attached to any FTA trade deal with the UK. The latest version of the trade mandate has responded to some EU concerns that it did not go far enough in requiring the UK to stick to EU regulations, the article added. Moreover, the revised document also reportedly makes it clearer that EU wants any agreement to uphold the current right of EU fisherman in UK waters.

My analysis on this news earlier this morning; “as we have been banging on about for weeks now, the UK and EU positions are still a long way apart, and today’s news shows that the EU are really digging in. The UK do not want to be bound by EU rules and want EU fishermen out of their waters. The EU wants the UK to stick to EU rules (via agreeing to a “level playing field”) and wants continued access to UK fisheries. It remains difficult to see how a compromise can be reached on either of these issues, as such the likelihood of a WTO end to the transition period (the same as a no-deal Brexit), remains high, and will weigh on GBP in the foreseeable future.”

What does this mean?

As has been the trend so far this year, it looks as though the battle between GBP bullish factors (solid data/neutral BoE/fiscal stimulus) and GBP bearish factors (EU trade deal uncertainty) is set to continue.

Let the GBP rollercoaster go on!!


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