That is the likely risk, in my opinion, since the UK economy is more vulnerable to the real- term drop in household disposable incomes than its counterparts in the US and Euroland. A larger proportion of the UK economy is consumer-focused, and the UK’s recovery was driven by a sharp improvement in household spending in 2021.
Last week’s data and surveys recorded more of a slowdown in the pace of employment but a rise in wage inflation in December, higher consumer and retail price inflation and a rebound in retail sales volumes in January. However, the final data release on retailing was revealing, as retail sales only recouped about half the fall seen in December, and a series of downward revisions to the data left volumes lower overall.
This week has already seen the release of preliminary February manufacturing and services Purchasing Managers’ Index (PMI) data. The market consensus was for a hike in the services PMI, but a small slowdown in manufacturing activity. The outturns were better than expected, with the services outturn materially up to 60.8 from 54.1 in January, which was the highest reading since June 2021. That, after a sharp rise in house prices in February, as recorded by Rightmove, gave the week a positive kickstart.
In the remainder of the week, the UK releases January public finances figures on Tuesday (22 Feb), along with the February Confederation of British Industry (CBI) industrial trends survey. On Thursday the CBI releases its February distributive trades survey and first thing on Friday sees the Growth from Knowledge consumer confidence survey for February released. These data and survey releases are expected to record some slowing in the progress of the UK recovery and possibly some weakening of consumer confidence. If the news in aggregate is bad, then the risks are to the downside for the GBP.
However, the biggest potential risk for the GBP could come from the Bank of England’s Treasury Select Committee testimony, due on Wednesday. If the Bank of England re-issue statements suggest that the market is overpricing the interest rate hike risks, then that could prompt a renewed drop in the GBP’s value, with GBP/USD struggling to hold above $1.3650 and GBP/EUR struggling to climb back above €1.20. If, on the other hand, those testifying express greater concerns over the inflation outlook, then GBP may build on recent gains. Much like the weather affecting the UK over the course of the second half of last week, there could more volatile conditions ahead for the economy, asset markets and FX over the next few weeks.