GBP Fundamental Forecast: Constrained Consumers Send it Lower
The pound confronts some obstacles, including rising into a period of poor growth, tenacious (though somewhat lower) inflation, which hurts expenditure, and unresolved Brexit difficulties. The Bank of England has the difficult challenge of maintaining rate rises that may have already pushed the country into recession if the December strike results in negative economic growth for Q4. Along with early favorable inflation statistics, it looks like GBP prospects aren't looking very promising outside of GBP/USD, where dollar selling has aided the underperforming currency.
UK RETAIL SALES ARE DISAPPOINTED
The pound fell on Friday as UK retail sales data showed a month-on-month reduction in both the report's 'volume' and 'value' indicators. Following the booze-fueled World Cup economic rebound in November, UK consumers elected to tighten their belts in December as the cost-of-living crunch persists. Consumers not only spent less but also bought fewer items during the strike-affected month of December, resulting in negative ratings on both counts when compared to November. Longer-term trends show a rise in value paid with a decrease in volume, implying that UK consumers are paying more for less.
JEREMY HUNT WOULD LIKE TO EXTEND THE 5P FUEL LEVY CUT IN HIS SPRING BUDGET.
On the fiscal front, UK finance minister Jeremy Hunt intends to continue the 5p gasoline price drop for another year, as announced in his spring budget. The 5-penny drop was first proposed by then-finance minister Rishi Sunak to reduce fuel prices at the pump. Hunt must tread a fine line since non-targeted government expenditure can keep inflation high for longer.
BOE GOVERNOR ANDREW BAILEY EXPECTS INFLATION TO FALL RAPIDLY IN 2023
Andrew Bailey, Governor of the Bank of England, provided more views on inflation and the market's expectations for the terminal rate. Bailey maintains previous estimates that show inflation falling sharply in 2023 but still well above the 2% objective. About reduced inflation in December, Bailey termed the promising statistics as the "beginning of an indication that a corner has been turned". His views were reasonably cautious, considering the continuance of increased costs in the UK, where food price hikes remained a concern.
In the United Kingdom, average salaries have increased at their quickest rate since 2001 (6.4% year on year), yet this pales in contrast to inflation, which recently hit 11.1% year on year. The Bank of England has advised against salary rises, citing the risk of a wage-price spiral, which would keep inflation high for longer. Instead, the Bank has to get it right and dramatically cut inflation.
EVENTS WITH HIGH RISK FOR THE NEXT WEEK
Next week's high-impact sterling events are limited to Flash services and manufacturing PMI data, as well as a handful of high-profile UK earnings announcements from IBM, Boeing, EasyJet, Comcast, SAP, and Diageo, to name a few.
Next week's narrative will revolve around fourth-quarter US GDP and if the Fed looks to be steering a gentle landing despite its own poor retail sales figures. Then, on Friday, PCE inflation figures will be released. Cable is still one to keep an eye on because of its direct exposure to the currency.