British Pound Gains Ground as UK Inflation Rises

UK inflation has a tendency to surprise the markets and that happened again on Wednesday as December CPI ticked upwards to 4.0% y/y, up from 3.9% in November and above the consensus estimate of 3.8%. The main driver of the upswing was higher alcohol and tobacco prices. Monthly, CPI rose 0.4%, up from -0.2% in November and higher than the consensus estimate of 0.2%.

Sunset Market Commentary

The president of the Swiss National Bank told Bloomberg that the recent strengthening of the Swiss franc has been significant enough so that it affects the inflation outlook. The central bank will take that into account at the next policy meeting on March 21. At the latest December meeting, the SNB shifted to a more neutral approach by no longer keeping the door for rate hikes formally open and making the FX intervention threat bidirectional again instead of focusing on CHF sales.

Pound Doesn't Give Up Without a Fight, Thanks to CPI

UK inflation statistics sparked a 0.8% rally in the pound on Wednesday morning, supporting GBPUSD gains against a general pull from risk assets.

Australia December Labour Force: Soft Finish to the Year

Labour market conditions have clearly softened. While shifting seasonality has blurred the signal from the seasonally adjusted data, the underlying trend is clear: demand is slowing, while potential labour supply continues to grow. We are seeing labour demand slow when it comes to growth in employment, but more clearly through the number of hours worked.

Trimming

Investors continue to come back to their senses and the latter involves trimming the interest rate cut expectations that went ahead of themselves over the past few months. Yesterday, the Federal Reserve’s (Fed) Beige Book survey suggested that resilient consumer spending during the holiday season helped propel the US economy, and another solid rise in the US retail sales confirmed that spending in the US didn’t slow by the end of last year.

Markets Scaled Back Expectations for March Fed Rate Cut to About 50%

Markets scaled back expectations for a March Fed rate cut to about 50%. Later in the session, the Fed Beige book indicated that there was little change in economic activity. At the same time, holiday sales held up well and contact indicated that the prospect of Fed rate cuts is a source of optimism going forward. German yields added between 9.8 bps (2-y) and 0.4%(30-y).

OPEC Forecasts an Increase in Oil Demand in 2024

OPEC expects global oil demand to increase by 2.25 million barrels per day (b/d) in 2024, representing a 2.2% increase compared to 2023.

Aussie Stems the Bleeding

The Australian dollar has stablilized after a nasty tumble this week. In the European session, AUD/USD is trading at 0.6555, up 0.06%. The Aussie ignored a weak employment report which showed job growth plunged by 65,100 in December. The unemployment rate remained steady at 3.9%.

Bank of Japan Meets But No Fireworks Expected

Although inflation in Japan has been above the 2% target for more than a year and a half, the Bank of Japan stood pat at its December meeting, remaining the last major central bank in the world with negative interest rates. In the accompanying statement, the Bank pushed back against a quick exit from loose monetary conditions until wage growth and inflation stabilise at target levels.

GBP/USD Flat Ahead of US Inflation Data

The British pound is unchanged on Thursday, trading at 1.2741 in Europe. We could see some movement from the pound in the North American session following the release of the US inflation report. On Friday, the UK releases GDP, which is expected to show a 0.2% gain in November, after a 0.3% decline a month earlier.