Not even the hawkish BOE was enough to prop sterling higher in last week, so let’s see if the upcoming set of catalysts could convince bulls to charge this time.
U.K. inflation reports (Feb. 13, 9:30 am GMT)
Yep, it’s time for another round of U.K. inflation reports! Now this has been a pretty huge deal for the pound since traders are thinking it’s just a matter of when the BOE might be forced to rein price levels back in with another rate hike.
However, the annual headline CPI reading is expected to have ticked down from 3.0% to 2.9% in January while the core reading likely advanced from 2.5% to 2.6%. These figures should give a better idea of whether or not pound strength has kept price levels in check for the past month.
Keep in mind that stronger than expected inflationary pressures could dampen consumer spending, so the central bank would need to act fast to keep that from happening.
U.K. retail sales (Feb. 16, 9:30 am GMT)
Before the week comes to a close, we’ll get a glimpse of how changes in price levels have been affecting consumption. After posting a 1.5% slide in December, retail sales are expected to show a 0.6% rebound for January.
Now the actual readings have been surpassing estimates for five out of the last seven releases and have also seen upgrades more often than not. Stronger than expected data could remind traders that the U.K. economy could stay resilient despite rising price levels and Brexit jitters, which might be enough to keep traders hopeful for a BOE hike soon.
Last Week’s Price Review
The pound displaced the anemic Aussie and is now the worst-performing currency of the week (as of 3pm GMT).
The pound initially had a steady start, but later got swamped by sellers during Monday’s London session.
And as noted in Monday’s London session recap, the pound got a pounding because the U.K.’s services PMI report missed expectations (53.0 vs. 54.1 expected, 54.2 previous) and commentary from Markit noted that while “selling prices were raised as companies attempted to protect profit margins,” the rate of increase “softened to a four-month low,” which is bad news for CPI down the road.
After that bout of weakness, the pound traded mostly sideways, likely because traders were waiting for Thursday’s BOE Statement.
And as highlighted in Thursday’s London session recap, the BOE upgraded its GDP growth and CPI forecasts and even had this rather hawkish thing to say (emphasis mine):
“The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”
The prospect of more rate hikes sooner caused the pound to spurt higher across the board. However, the pound later returned most of its BOE-related gains to its peers.
There was no apparent catalyst for the pullback, but profit-taking is a possibility since the pound was able to hold onto some BOE-related gains, except against the yen and the Swissy. But that had more to do with safe-haven demand for both currencies since risk aversion was rampaging at the time.
Anyhow, dip demand was notable across the board. And so the pound later found support and was already tilting to the upside by the time Friday’s Asian session rolled around.
Sadly for the pound, Friday’s London session offered a nasty surprise. And as detailed in Friday’s London session recap, the U.K.’s trade report and industrial report were both disappointing, which caused the pound to bleed out.
And to add salt to injury, E.U. Brexit Negotiator Michel Barnier later said in an interview that the E.U. and the U.K. still had some disagreements and that the E.U. is adamant that some issues are non-negotiable. More importantly, “If these differences persist, a transition is not a given.”
And that likely reignited Brexit-related jitters, causing the pound to slump even more.