Markets eye key inflation data this week

The British pound extended its losing streak as concerns over the UK’s fiscal outlook continued to weigh heavily on market sentiment. Yields on 10-year UK gilts surged past 4.88%, edging closer to the psychologically critical 5% level. Investors remain unconvinced by the government’s assurances of fiscal discipline, despite repeated commitments from Chancellor Rachel Reeves.

Speaking at a press conference in China, Reeves reiterated her pledge to rein in public finances, declaring, “We will pay for day-to-day spending through tax receipts and reduce debt as a share of GDP.” However, these statements failed to reassure markets focused on the country’s escalating fiscal challenges and sluggish economic performance.

UK-China trade push falls flat

Reeves’ visit to Beijing, aimed at strengthening trade relations with China, included the announcement of GBP 600 million in trade and investment deals over five years. Despite the headline figure, markets largely shrugged off the news, viewing it as insufficient to offset the broader economic malaise gripping the UK.

Domestically, Reeves faced backlash for her overtures to China, with critics accusing her of jeopardizing national security for limited economic gains. The optics of the trip did little to bolster confidence in the pound, which closed the European session as the day’s worst-performing major currency.

Global currency markets: Yen tops, Sterling slumps

In the broader currency markets, the pound led losses, with the euro also under pressure. The dollar, consolidating its strength from last week’s strong labor data, ranked as the third-weakest currency. Conversely, the Japanese yen emerged as the best performer, buoyed by risk-averse sentiment. The Australian dollar followed, supported by optimistic Chinese trade data, while the New Zealand dollar rounded out the top three. The Swiss franc and Canadian dollar traded in the middle of the pack.

A high-stakes week ahead: Inflation and growth in focus

This week promises pivotal developments, with inflation reports from the US, UK, and Australia taking center stage alongside UK GDP data.

US inflation and retail sales in the spotlight

The dollar’s trajectory will be shaped by upcoming CPI and retail sales reports, following last week’s unexpectedly strong non-farm payrolls data. The robust labor market performance has dampened expectations of an early Federal Reserve rate cut, pushing potential easing into mid-2025.

If inflation surprises to the upside, markets may further extend their timeline for rate cuts, bolstering the dollar. Additionally, strong retail sales figures could reinforce perceptions of resilient consumer demand, limiting the Fed’s room to pivot dovish.

Sterling faces triple-test with GDP, CPI, and retail sales

Sterling remains vulnerable as the UK releases key economic indicators this week. With the pound already reeling from fiscal concerns and stagflation fears, weaker-than-expected GDP or retail sales figures could exacerbate selling pressure. While an inflation surprise is possible, markets appear more attuned to signs of faltering growth in the wake of recent budget measures.

RBA policy hinges on data

The Australian dollar faces a critical juncture as markets weigh the Reserve Bank of Australia’s next move. Weak labor market data could prompt the RBA to begin easing as early as February, though many are eyeing May as the more likely start. Upcoming fourth-quarter CPI figures, due in two weeks, will be pivotal in shaping expectations.

External factors also loom large, with China’s GDP and related economic data likely to influence regional sentiment and, by extension, the Australian dollar.