The Pound has risen this morning following better than expected UK services and retail sales figures.
UK releases this week have been mixed but generally supportive. Tuesday saw a weaker UK jobs report but this was offset by Wednesday’s surprise upside in inflation for December. Then this morning we’ve had a better-than-expected UK retail sales figures for December (2.5% vs expected 0.1%) and, importantly, a strong services (PMI) survey data which is a forward-looking data set (54.3 vs expected 51.7).
The resilience in consumer spending and improved sentiment across the service sector may reflect some post-budget relief, with tax rises less severe than initially feared. Taken together, this week’s data is likely to limit the dovish tone from the Bank of England which has been supporting for Sterling. Markets still expect the next rate cut to be either April or June subject to how inflation data goes over the next couple of months.
In other news, President Trump delivered a U-turn on his proposed Greenland tariffs this week. As mentioned in our last update, markets have become numb to these threats with his bark seemingly always worse than his bite, so this wasn’t too unexpected. However, I think most investors have been quite surprised at how quickly this reversal came about this time around. The initial reaction was a slight reversal of the early week “Sell America” trade with the USD, US stock market and Treasuries recovering some of their earlier losses. However, a full snap-back has yet to materialise. This is likely because the initial relief has been replaced by longer-term concerns. Trump has been vague on Greenland deal/framework details so far and negotiations may well drag out. Furthermore, this whole episode once again highlights the unpredictability and erratic decision making of Trump’s which does nothing to promote a smooth world order (the antithesis of what market participants crave).
As a result, the GBP/USD has pushed up nearly 1% from yesterday's low and is towards the higher end of where it’s traded since September. The GBP/EUR has also clawed back some ground and up nearly a cent from Wednesday’s low but still caught within familiar ranges. The EUR/USD remains buoyant and towards the higher end of where it’s traded so far this year.
Next up we have US PMI figures out this afternoon and the Federal Reserve will be announcing its latest policy decision next week. We’re not expecting any change in US interest rates though and we do not expect Chair Powell to hint at an imminent cut either, which may provide a bit of relief to the USD.
