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Pound Sterling limps into an action-packed week, which will bear the final data prints of 2024 and a Bank of England interest rate decision.
These data follow Friday's selloff in GBP exchange rates that came in the wake of a below-consensus UK GDP growth report that showed the economy was at risk of flatlining into year-end, weighed by the new government's negative messaging and tax raid.
Economic surprises drive currency markets, and the UK has gone from outperforming expectations in the first half of the year to underperforming as business and consumer confidence take a dive.
The selloff sees the Pound to Euro exchange rate retreat from last week's 2024 high at 1.2156 to 1.2028. The Pound to Dollar exchange rate looks to be in the next leg lower of the multi-week downtrend, having retreated to 1.2623.
For the Pound to stabilise, this week's data must beat expectations, and the Bank of England must keep interest rates unchanged and signal it is content to follow a quarterly pace of rate cuts.
"GBP/USD has extended its decline from $1.28 towards $1.26, whilst GBP/EUR is pulling back after closing at its strongest level in eight years against the euro earlier this week. This weakness could run further in the short term, especially if Bank of England (BoE) easing bets increase," says George Vessey, Lead FX Strategist at Convera.
Monday kicks off with the release of the PMI survey for December. Given that we are receiving the report a week earlier than would normally be the case, it will cover a short portion of the month.
Nevertheless, this is the pre-eminent short-term survey that will provide a guide to activity and sentiment in the services sector.
The consensus expects the all-important Services PMI to recover to 51 from 50.8. Anything above this level can bolster the Pound, but an undershoot could put the UK currency back under pressure.
Tuesday brings the UK labour market report, which is a crucial input in Bank of England interest rate policy.
"Recent UK surveys have pointed to a further softening in the domestic labour market and we expect that to be evident in the upcoming ‘official’ data release from the ONS. Having moved up to 4.3% by the end of Q3, we forecast the unemployment rate nudged up to 4.4% in the three months to October," says a note from Lloyds (LON:LLOY) Bank.
The consensus expects a reading of 4.3%. Watch wage figures, as average weekly earnings are expected to have risen 5%.
Disappointments here would encourage the market to 'price in' more rate cuts from the Bank of England than are currently anticipated.
This would mechanically weigh on Sterling.
Wednesday brings the UK CPI report, which will tell us whether the Bank of England has an inflation problem on its hand.
The rule of thumb is that above consensus inflation encourages the market to lower expectations for Bank of England rate cuts, which bolsters the Pound.
However, we are worried that the market will start fretting that the UK is entering a phase of low growth and high inflation, which is typically unsupportive of the Pound.
Could we see a lose-lose outcome for the Pound mid-week?
"The decisive move in headline CPI inflation back above the 2% mark in October provided an emphatic indication that the battle to bring UK inflation sustainably to its target remains far from over. That message is likely to be reinforced by the upcoming CPI report where we forecast the headline rate of inflation to rise again to 2.7% in November," says Lloyds Bank.
Also on Wednesday is the U.S. Federal Reserve policy decision, which will be key for the broader global FX landscape, and Pound-Dollar in particular.
Markets expect the Fed to opt for a third successive interest rate cut and a second consecutive 25 basis points reduction.
"In terms of its plans for next year, it is likely to indicate that further interest rate cuts will follow in 2025 but probably at a less rapid pace," says Lloyds. The degree to which expectations are lowered will determine the FX market reaction.
"Given that money markets have already come a long way in pricing out FOMC cuts over the past couple of months, and positioning remains skewed towards dollar longs, our base case remains continued consolidation for the dollar into year-end before another leg higher next year," says Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics.
Thursday sees the Bank of England interest rate policy decision, where no change is expected.
However, there are numerous moving parts to consider, including the recent slowdown in activity and rise in inflation.
Does the Bank confirm the quarterly pace to cutting rates, or does it hint that risks are leaning towards a slower or faster pace?
The answer will determine the GBP reaction.
"The Bank of England’s final policy meeting of the year is likely to be largely a non-event with the MPC widely expected to leave Bank Rate at 4.75%. Such an outturn would be consistent with the overall message that suggests that the MPC overall is content with only gradual reductions in Bank Rate for now," says Lloyds.
Friday brings retail sales data. These will show how the consumer fared in the run-up to year-end. Evidence of recovering consumer demand could suggest the economy can fare better in 2025 and keep inflation elevated.
We have seen the Pound react notably to retail figures in 2024, ensuring the Pound will be kept on its toes right into the weekend.
An original version of this article can be viewed at Pound Sterling Live