UK Data Deluge to Direct Bank of England Decision

16/01/2023

GBP has taken a back seat to other more exciting currencies this year, with the yen at the forefront of the market's mind ahead of the BoJ meeting on Wednesday. But it's mid-month so we get the usual deluge of UK data which should set the tone for the February 2nd Bank of England rate decision.

The standout report will be the CPI release on Wednesday which is likely to ease in year-over-year terms to 10.6% and mark the second consecutive slowdown from the 41-year peak of 11.1% in October. But the figures remain unacceptably high and way above the bank’s target of 2%. The drop in petrol prices, which slid close to 5% on the month, should drive the decline. Rampant food prices will grab the attention after the 16.6% annual increase in November. The core print, which strips out those more volatile food and energy prices, should also ease although policymakers will be watching the services part of this to assess domestically driven price pressures.

The UK still has a tight labour market with unemployment historically low, and new data on Tuesday will inform on whether wage pressures are still as persistent as ever. Hawks on the MPC will be wary if labour shortages are not easing and redundancies are still low.

The volatile retail sales numbers finish off a busy week with acitvity set to decline on an annual basis. Monthly data is expected to increase as goods cost more but this masks the fact that the volume of goods that people are buying is significantly down on this time last year. This cost-of-living crisis will dominate the outlook for the year head. 

Markets are edging towards a 50bp rate hike at the MPC meeting next month with a total of just less than 100bps of hikes priced in by August this year. Much will depend on how quickly inflation falls and growth shrinks. Sterling has been mid-pack in the G10 currency space this year, a decent performance after the ructions in UK fixed income markets last autumn. An upside surprise in the CPI data would further boost the pound.