The Pound lost ground against the Euro last week as UK inflation rose less-than-anticipated, real wage growth struck a two-year low and the three-month retail sales index dropped to its lowest level since the year 2000.
Inflation Expectations Drive Sterling
The Pound to Euro exchange rate got off to a good start last week, rallying by around 75 pips in anticipation of January’s consumer price index report.
However, on Tuesday demand for Sterling softened when the CPI figure disappointed estimates of 1.9% with a slightly lower score of 1.8%. Although the CPI report marked the fastest rate of inflation for over two-and-a-half years, it was not deemed high enough to alter the Bank of England’s neutral rate outlook.
Real Wage Growth Stutters
GBP/EUR lost more ground on Wednesday as investors reacted to the latest UK labour market report. Unemployment remained at an 11-year low of 4.8%, but traders were concerned with a surprise slowdown in earnings growth from 2.8% to 2.6%, which meant that real wage growth (earnings minus inflation) tumbled to a two-year low of 1.4%.
The minutes from the European Central Bank’s January meeting showed little desire to halt the ECB’s stimulus programme, with policymakers stating that rising energy costs had not yet translated into broader inflationary pressures. The single currency still managed to rally versus Sterling on Thursday, despite the dovish ECB statement.
Retail Slump Hampers Pound
The Pound sustained further losses on Friday due to a shock miss in the January retail sales report. Adding to fears that rising prices and falling real wage growth would constrain economic growth in 2017, the monthly retail index printed at -0.2%, disappointing forecasts of +0.7%. The January figure followed falls of -2.2% in December and -0.1% in November, marking the first time since the year 2000 that retail sales had fallen for three consecutive months.
Week Ahead
The main ecostats to look out for this week are the UK fourth quarter GDP revision, which is anticipated to see growth confirmed at 0.6%, and the Eurozone consumer price index reading, which is tipped to remain at 1.8%.
Also on the agenda is a speech from BoE Governor Mark Carney, which could move the markets if the central bank chief gives any clues on future interest rate policy, and the Brexit discussion in the House of Lords. If peers successfully manage to add amendments to the Brexit bill then we could see an uptick in demand for the Pound.