The GBP had a very good week despite the softness of economic activity data. It began last Monday around USD1.3820 and moved higher on Tuesday after CPI figures showed the UK inflation rate stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. After Wednesday’s US CPI figures saw the USD initially rally then plunge, the pound then rose just under 1.40. On Thursday and Friday, it extended these gains to a 2-week high just below 1.4140. Then came news that UK retail sales grew just 0.1% m/m in January, well below consensus expectations of a +0.6% m/m increase and by the close of business the GBP had lost more than a cent. Overnight in Asia, the pound has marginally extended Friday’s losses and is down against all the major currencies with GBP/USD holding just above 1.40.
With the balance of incoming economic data generally soft – especially in those areas linked to the housing market, consumer confidence and expenditure - the GBP continues to be buffeted by alternating hopes and fears around Brexit negotiations. There are only a little over 4 weeks to a key European Council Summit on March 22-23, and UK Cabinet members are currently embarked on a series of speeches which are designed to put a little more flesh on the bare bones of its negotiating position. Last Wednesday it was the turn of Foreign Secretary Boris Johnson and on Saturday the Prime Minister gave a speech in Munich about Britain and European security policy. On Sunday, in an interview for the BBC's Andrew Marr Show, Guy Verhofstadt, the EU parliament's Brexit chief, said that Britain cannot cherry pick the areas where it wants to make bespoke deals, and that any deal should ensure there "should be no competitive advantage for either the UK or EU. What will be in that part of the agreement, we will see. Passporting will not be there, you have to be part of the Single Market," he said.
For the week ahead in markets, the focus will be on the major UK banks which all report annual profit numbers. In economics, Wednesday brings the latest unemployment and average earnings figures and, just as in Australia, currency investors will be watching closely for any sign of pick-up in wage growth. Futures markets are currently reflecting a 70% probability of a 25bp hike at the May MPC meeting. 32 of 57 analysts polled by Reuters last week said the BoE would raise its Bank Rate to 0.75 percent in May, up from only 13 of 71 economists in a similar survey in January.