Mounting speculation that the Bank of England (BoE) will cut interest rates at its January meeting dominated sentiment towards the pound this week. This was fuelled by a stream of concerning economic data releases, which suggest the UK economy is stuck in the doldrums.
- On Monday, a weaker-than-expected GDP reading showed that the UK economy contracted by 0.3% in November, as the general election got into full swing.
- On Wednesday, it was revealed that UK inflation fell to a three-year low in December, after the Consumer Price Index (CPI) recorded its weakest reading since November 2016.
- On Thursday, the BoE’s latest survey of credit conditions suggested that domestic confidence levels are on the slide.
- On Friday, came the news that retail sales fell again in December – the fifth month in a row without growth – as shoppers tightened their purse strings over Christmas.
All of which raised concerns about UK economic growth and increased speculation that the BoE could cut interest rates soon. Throughout this deluge of disappointing data, we heard various BoE monetary policymakers come out and bang the drum for an interest cut to stimulate the faltering economy. The pound to US dollar rate subsequently dipped below the 1.30 level for the first time in 2020 on Monday, where it remained for much of Tuesday as well.
US and China Sign Phase One Trade Deal
The dollar’s week was dominated by the signing of the so-called phase one trade deal between the US and China. President Trump and Chinese vice-premier Liu He put pen to paper on an agreement to pause the trade war that has weighed on the global economy for nearly two years. While it offers some relief, uncertainty remains after it left tariffs in place on hundreds of billions of dollars of Chinese imports. Renewed fears that the trade war could damage the global economy gave the dollar headache.
US-China trade war concerns overshadowed some encouraging US data last week. Most notably, the Consumer Price Index (CPI), which increased slightly in December, with monthly underlying inflation pressures easing. If the US economy continues to show signs of strength, the Fed could be persuaded to keep interest rates unchanged throughout 2020 and beyond.
It’s a bank holiday in the US on Monday, meaning the dollar must wait until Wednesday for any economic data of note. This comes in the shape of the Housing Price Index, which is forecast to hold steady, and Existing Home Sales numbers, which are expected to rise. Thursday’s Initial Jobless Claims figures are followed by the Markit Manufacturing PMI and Markit Services PMI on Friday.
Following a quiet day in the UK on Monday, we receive the ILO Unemployment Rate on Tuesday, which is forecast to tick up from 3.8% to 3.9%. Things ramp up again as the week draws to a close, with the release of the Markit Manufacturing PMI and the Markit Services PMI on Friday. The GBP vs USD rate could come under pressure if the readings continue to point towards sluggishness in the UK economy, thereby fanning the flames for an interest rate cut.
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