Last week's slew of data reported lower headline consumer price inflation in December, higher average earnings growth in November, and a weaker Bank of England Q4 credit conditions survey. However, the greatest interest fell on the January GfK (Growth from Knowledge) consumer confidence survey and December retail sales volumes data. Some alleviation in energy and fuel price pressures, coupled with a normalising of retail conditions versus the previous two Decembers, had given rise to expectations that volumes would increase in December. Instead, consumer confidence and retail volumes fell back, signalling that consumers had behaved cautiously during the Christmas retail period and in the early phase of discounting that had followed.

The pound enjoyed a further rally against the US dollar again last week, but showed little strength elsewhere. Against the euro and yen, the pound remains rangebound, and towards the bottom of recent ranges as well. The risks are that the pound's struggles for momentum persist, and outside of the ongoing sell-off against the US dollar, the UK's economic headwinds will mount an increasing challenge, in my opinion.

  For this week, manufacturing and services PMI (Purchasing Managers’ Index) indices for January, producer prices for December, and CBI (Confederation of British Industry) industrial and retail surveys for January, will provide little cover for the GBP, in my view. Any retrenchment in risk appetite is another problem that is likely to exert itself more vigorously on the GBP than other major currencies, in my opinion.

The Euroland economy continues to perform poorly, but perhaps not as poorly as in recent months. Recent surveys have pointed to an improvement in business and consumer confidence as we headed into 2023. However, that has meant that ECB (European Central Bank) officials have maintained a 'hawkish' approach to monetary policy in their most recent comments. Pointing to the work that still needs to be done on inflation, Governing Council members such Knot, Villeroy, Rehn and Holzmann have continued to push for aggressive additional monetary tightening.

 The speeches should abate as we head into the second half of this week, ahead of the decision on monetary policy due on 2 February. For financial markets then, a focus on the economic data and surveys will return, with the manufacturing and services PMIs for January, and German IFO* business climate survey (January) likely to be in focus for markets. 

 For the euro, a strong set of survey figures could help sustain recent momentum against the US dollar, but there may be greater interest in the performance of the euro against other majors like the pound and yen. These will likely be the currencies to watch for any independent momentum, in my view.  

*Information and Forschung / Germany’s Institute for Economic Research

Last week saw more comments from various Federal Reserve spokespeople, all of which warned the markets that they were taking an 'optimistic' view of the trajectory of inflation and continuing to hint at a higher terminal level for the targeted Fed funds rate. These comments continue to be mostly ignored by the financial markets, which seem more pre-occupied with the outturn of the next Fed meeting, due on 1 February. 

Also last week, the data and surveys continued to paint a mixed picture for the macroeconomy. Bigger-than-expected declines in the Empire manufacturing survey (January), retail sales and industrial production (December) and producer prices (December), were counterbalanced by the rise in the NAHB (National Association of Home Builders) housing market index (January), and better-than-expected housing starts and existing home sales (December).

This week's main focus is on preliminary Q4 GDP (Gross Domestic Product) figures, due on Thursday. Will there be plenty of momentum carried forward to 2023, or will activity have slowed sharply in Q4? As for the US dollar, it continues to shed value against other majors, but how much further is there to go with this move?

Last week's key central bank meetings were the BoJ (Bank of Japan), the BMN (National Bank of Malaysia), BI (Bank Indonesia), the Norges Bank (Norway) and the PBoC (People's Bank of China). The BoJ announced that policy would be on hold, with the yield curve control policy, that was changed in December, remaining more accommodative of higher JGB (Japanese Government Bonds) yields. Surprisingly, the BNM held interest rates at 2.75% whilst BI raised interest rates from 5.5% to 5.75% and the Norges Bank held interest rates at 2.75% as well, with the market almost evenly split in expectations between no change and a 25-basis point hike. The PBoC also left policy unchanged.

The signs are that most central banks feel that they can be far less aggressive as far as additional tightening is concerned, because the inflation environment appears to be improving and the economic environment globally is worsening. For this week the central bank meetings to focus on from Sri Lanka, Thailand, Canada, South Africa and Colombia. Could one or more of these central banks spring a surprise on monetary policy with less or no monetary tightening?