UK Data and US CPI to Impact GBPUSD

This week, the UK economic data slate is extensive as economists assess whether the country has fallen into recession while US economic growth remains robust. Upcoming figures will provide insights into inflation trends and what the BOE and Fed could do next.

UK Economic Trends Intact Despite Revisions

Revisions to UK labour force survey data showed unemployment was lower than initially estimated last year, revealing BOE policy transmission challenges around persistently high inflation. At 3.9%, unemployment sits below structural levels. However, consensus points to the trend of gradual jobseeker growth continuing, with unemployment projected to rise modestly to 4%. January payroll changes are forecast at 6K, following 11.7K additions in December.

 Despite economic stagnation and rising unemployment, UK inflation is expected to remain above target. This makes an imminent dovish policy shift unlikely for the BOE, which is seen adjusting rates slower and to a lesser degree than peers in 2022. Forecasts suggest headline inflation will tick up to 4.1% year-over-year in January from 4%, while core inflation eases slightly to 5% from 5.1%. However, a negative PPI across the board may signal eventual inflation declines.

US Data in Focus Amid Fed's Inflation Battle

Tomorrow, the US will report its anticipated inflation figures for January after posting strong job numbers, including higher-than-expected wage growth. While healthy economic growth allows the Fed to keep interest rates elevated, it could complicate efforts to fight inflation. However, the consensus forecasts see headline inflation returning to 3.1% from 3.4% prior, partly thanks to lower fuel prices and core inflation continuing its downward trajectory to 3.7% from 3.9% prior.

The market still expects the Fed to enact six interest rate hikes this year, despite pushback from Fed Chair Jerome Powell in the days following the last FOMC meeting. However, the consensus estimate for the first hike has shifted from March to May. A figure that beats inflation expectations may shift consensus towards a more hawkish stance, but it would not be easy to be more dovish. This could mean there is an increased risk of the GBPUSD suffering another bout of weakness, like at the start of the month. However, with forecasts to remain largely flat through the year, it may be that markets are simply waiting for more clarity on which central bank will cut first and how aggressively.

GBPUSD

The pound has appreciated against the dollar since rebounding from 1.2518, though testing the area below the lower flag line opens up the possibility of exerting additional pressure should 1.2673 or 1.2756 prove resilient. This might expose 1.25 and potentially pave the way for 1.2428 and 1.2373 to come into play. However, a break above could encourage buyers to recapture the high of 1.2828.

Source: SpreadEx / GBPUSD

Key Takeaways

Several important UK and US economic data releases are set to impact GBPUSD this week. In the UK, unemployment and inflation data will show if the economy has entered a recession while providing insight into the BOE's policy stance. Inflation is expected to remain above target despite stagnant growth, suggesting the bank will not take a dovish shift. In the US, inflation is forecast to return to prior levels due to lower fuel prices, although core will likely continue to decline. The market awaits clarity on which central bank will cut first and by how much to determine the direction of the cable.