Sterling Could Stay Weak Even if U.K. Wage Growth Accelerates — Market Talk

A trade conflict involving the European Union is "very likely," European Central Bank Executive Board Member Isabel Schnabel said over the weekend, noted ING.

Perhaps the euro should be concerned that the online prediction markets only have low pricing of tariffs on the EU. this week, wrote the bank.

Equally, ING doubts foreign exchange markets are fully priced to universal tariffs and would get hit were these to emerge.

Away from events in the United States this week, the eurozone's focus will be on a couple of speeches in Davos from ECB President Christine Lagarde, stated the bank.

Currently, markets are pricing 100bps of ECB easing this year, while ING's house view is 125bps. This week also sees the flash PMIs for January. Presumably, there won't have been much of a recovery here as the world awaits President Donald Trump's new economic agenda.

It is hard to know what to expect from the U.S. on Monday at the inauguration ceremony of Trump, but there is a chance that 1.0400/0435 caps any surprise rally on a softer-than-expected tariff story, pointed out the bank. 1.0225 could be the extent of any sell-off should the tariff story come in "hot."

is staying near the recent high of 0.8450/60. While ING and the United Kingdom sovereign credit default swap market don't think this is a former Prime Minister Liz Truss-style moment for U.K. sovereign risk, the bank thinks the solution to the current challenges is sterling negative.

To resolve the risk of breaching the fiscal rule, either the government needs to cut spending, the Bank of England to cut rates — lowering Gilt yields — or both.

There isn't a lot on the U.K. data calendar this week apart from the November jobs data on Tuesday. ING also wonders whether Wednesday's release of the December budget figures will draw greater attention than normal.

But overall, the bank sees little reason for sterling to recover. Above 0.8450/60, can see 0.8500. is very much in focus as well given the prospect of the Bank of Japan hiking 25bps this Friday. 185 looks very possible here, added ING.

Central and Eastern European foreign exchange has been in the same mode since the beginning of the year, notably following the direction of the rates market, according to ING. The press conference of Poland's central bank (NBP) last week after it kept rates unchanged brought an extra dose of hawkishness, which ING thinks will shift the trading range from 4.260-280 to 4.250-270.

The interest rate differential widened by 10bps on Friday and investors are likely to see more on Monday, which will keep PLN supported.

On the other hand, ING remains negative on the Czech Republic's koruna (CZK) given its expectations of a central bank (CNB) rate cut in February, which should push up towards 25.400.

is trying to stabilize after high volatility at the turn of the year and the bank sees levels around 412 for now.

Sterling falls to a four-month low against the euro and turns lower against the dollar. ING expects concerns about the U.K.'s fiscal outlook following the recent sharp rise in U.K. government bond yields could weigh on the currency. The U.K. isn't facing a "Liz-Truss style moment" where the former prime minister's tax-cutting plans in 2022 sparked market turmoil. However, the solution to the current challenges will be sterling negative, ING's Chris Turner says in a note. "Either the government needs to cut spending, the Bank of England to cut rates (lowering gilt yields) - or both." EUR/GBP hits a high of 0.8474, and could rise to 0.8500, Turner says. Ten-year gilt yields rise 3 basis points to 4.677%, having recently hit a multi-year high of 4.921%. (renae.dyer@wsj.com)

Sterling weakens against the dollar and euro after data show U.K. retail sales unexpected fell 0.3% during December. The consensus forecast in a WSJ poll was for retail sales to be unchanged. December is typically a good month for retailers due to the Christmas period and these figures could increase the likelihood of an interest-rate cut by the Bank of England next month. "Despite the festive season, consumers tightened their belts, with ongoing financial pressures and caution around the cost of living weighing heavily on spending," says Ebury's Phil Monkhouse. Sterling falls 0.6% to $1.2170 from $1.2217 before the data. EUR/GBP rises 0.4% to 0.8451 from 0.8423 beforehand. (jessica.fleetham@wsj.com)

Societe Generale in its early Thursday economic news summary pointed out:

— The US dollar index rebounds to pre-consumer price index level, two-year United States Treasury defends 4.26% support. 10-year stabilizes at 4.65% after a 13bps drop on Wednesday, Brent crude climbs above $82/barrel. Below forecast U.S. CPI doesn't change the outlook for Federal Reserve pause at January FOMC.

— Yen/G10 crosses offered on mounting optimism of Bank of Japan rate increase next week. Scott Bessent, President-elect Trump's pick for treasury secretary, testifies at a Senate confirmation hearing on Thursday.

— United Kingdom November gross domestic product growth 0.1% month over month, below forecast (0.0% 3m/3m). Services +0.1%. Manufacturing -0.3%, construction +0.4%. OIS pricing a 91% probability of a Bank of England cut in February. flat at 1.2215, defends 200dma (0.8425).

— Australia's December employment adds 56,300 jobs, full-time slips 23,700, part-time up 80,000. The unemployment rate climbs to 4.0%. OIS pricing a 73% probability of a Reserve Bank of Australia rate cut in February. ACGB three-year -9.7bps at 3.95%. -0.1% at 0.6213.

— Bank of Korea unexpectedly holds the key rate at 3.0%, the consensus was a 25bps cut. BoK cites weak won and political turbulence.

— Day ahead: U.S. retail sales, SocGen forecasts up 0.5% month over month, excluding autos 0.3% rise, control group 0.5% higher. Philly Fed business outlook, weekly jobless claims. European Central Bank accounts of December meeting. ECB speaker Panetta. Poland central bank (NBP) forecast to stay on hold.

— Nikkei +0.3%, EUR 10-year IRS +1bp at 2.52%, Brent crude +0.3% at $82.3/barrel, Gold +0.2% at $2,697/oz.

The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

1048 GMT - Sterling could stay under pressure in the near term after U.K. economic growth data Thursday missed expectations, Monex Europe analysts say in a note. The data showed the economy grew 0.1% month-on-month in November after a 0.1% contraction in October but was below the 0.2% growth expected by economists in a WSJ survey. In the absence of further U.K. data Thursday, sterling will remain on the back foot in the near term, Monex analysts say. The currency remains vulnerable given concerns about U.K. fiscal policy and rising U.K. government bond yields, they say. GBP/USD falls 0.4% to 1.2200. EUR/GBP rises 0.3% to 0.8431. (renae.dyer@wsj.com)

1021 GMT - The gilt market faces increased volatility in the near term due to uncertainty around the pace and magnitude of Bank of England interest-rate cuts, Charles Stanley's Rob Morgan says. Weak U.K. GDP growth could cause the BOE to cut interest rates at a faster pace than markets expect, Morgan says. However, this isn't certain. U.K. inflation risks remain as major retailers have warned they could raise prices. Potenially, this could mean the BOE keeping rates at elevated levels, he says. Gilt yields surged to multi-year highs last week, then fell sharply on Wednesday after below-forecast U.K. inflation data. The 10-year gilt yield is last up 1 basis point at 4.722%, Tradeweb data show. (miriam.mukuru@wsj.com)

0952 GMT - Bitcoin eases after briefly returning above $100,000 following an unexpected fall in U.S. core inflation data Wednesday. The softer-than-expected inflation data and renewed optimism over potential crypto-friendly policies from U.S. President-elect Donald Trump boosted bitcoin earlier, Saxo Bank analysts say in a note. While bitcoin has returned below $100,000, analysts remain optimistic about further gains. Bitcoin falls 0.9% to $98,816 after hitting a one-week high of $100,805 overnight, according to LSEG. It reached a record high of $108,379 on December 17.(renae.dyer@wsj.com)

0933 GMT - The U.K. is likely to find it difficult to meet 2025 growth expectations after the slow growth in recent months, Berenberg's Andrew Wishart says in a note. Thursday's U.K. GDP data show the economy expanded by 0.1% month on month in November, while average growth in the three months to November was flat compared with the three months to August. "The smaller than anticipated 0.1% increase in GDP in November confirms that meeting the consensus GDP forecast of 1.4% in 2025 will be extremely challenging," he says. (miriam.mukuru@wsj.com)

0912 GMT - A limping U.K. economy makes more rate cuts at the Bank of England likely, Investec economist Sandra Horsfield writes in a note to clients. The economy returned to growth in November but at a rate weaker than had been expected, figures showed Thursday. That means the BOE's policymakers will need to take more seriously the prospect of a disappointing performance in economic activity this year, Horsfield says. The BOE looks set to cut rates by 25 basis points at its meeting early in February, followed by a further three cuts by the end of the year, according to Investec's projections. "Below-potential growth adds to spare capacity and should, in the medium term, weigh on inflation," Horsfield says. "Tighter financial conditions from higher bond yields do the same."(joshua.kirby@wsj.com; @joshualeokirby)

0909 GMT - The euro is struggling to recover materially as concerns about a weaker eurozone economic outlook and political headwinds weigh, ING's Chris Turner says in a note. Lower-than-expected U.S. core inflation data on Wednesday offered a good opportunity for the euro to rally as two-year rate spreads narrowed but gains were modest. This perhaps "represents a conviction view that the eurozone and the euro will underperform this year on weak growth and weak leadership in the region." The euro edges up 0.1% to $1.0296. It hit its lowest in more than two years at $1.0179 on Monday. (renae.dyer@wsj.com)

0857 GMT - U.S. Treasury Secretary nominee Scott Bessent is likely to maintain the strong dollar theme at his confirmation hearing later, ING's Chris Turner says in a note. Bessent on Wednesday said he wants to ensure the dollar remains the world's reserve currency and that the 2017 tax cuts and jobs act remains permanent. In the run-up to November's presidential election, he said tariffs are a useful negotiating tool. If tariffs are highlighted as a key tool in balancing government finances at Thursday's hearing, the dollar could rise, Turner says. "On balance, we think the dollar can stay bid today." However, if the DXY dollar index reaches 110 then the U.S. currency could see some profit-taking ahead of Donald Trump's presidential inauguration Monday. The DXY rises 0.1% to 109.158. (renae.dyer@wsj.com)

0831 GMT - The yields on U.K. government bonds edge higher after U.K. GDP data revealed slow growth in November and flat growth in the three months to November. This follows Wednesday's sharp decline in gilt yields after below-forecast U.K. and U.S. inflation data, though analysts say concerns about inflation remain. "The combination of zero growth over the past three months and above target inflation, at 2.5% year on year, is a challenging one for policy makers and households," Moneyfarm's Richard Flax says in a note. The 10-year gilt yield climbs 1.5 basis point to 4.730%, Tradeweb data show. (miriam.mukuru@wsj.com)

0817 GMT - The outlook for sterling remains negative after Thursday's weaker-than-expected U.K. economic growth data, Swissquote Bank analyst Ipek Ozkardeskaya says in a note. The economy grew 0.1% month-on-month in November after a 0.1% contraction in October but missed the 0.2% growth expected by economists in a WSJ survey. The data keep pressure on sterling after recent falls on U.K. fiscal concerns following a sharp selloff in U.K. government bonds which took yields higher, Ozkardeskaya says. Lower-than-expected U.K. inflation data Wednesday gave some brief respite to gilts and sterling, she says. GBP/USD falls 0.2% to 1.2220 and EUR/GBP rises 0.3% to 0.8427. (renae.dyer@wsj.com)

0809 GMT - Heavy borrowing costs are weighing on the U.K. economy and the Bank of England's rate-setters will likely reduce some of that burden by cutting interest rates next month, Capital Economics' Ashley Webb tells clients in a note. Booking just a 0.1% increase in November, and set to stagnate over 2024's final quarter as a whole, the British economy is "hardly firing on all cylinders," Webb says. That is partly due to new taxes set out in October's budget. However, with the manufacturing industry also weakening, high interest rates are also taking their toll, he says. "Today's release revealed that the economy continued to have little momentum towards the end of last year," Webb says. (joshua.kirby@wsj.com; @joshualeokirby)

0759 GMT - The dollar trades flat as it recovers some ground after falling on Wednesday's lower-than-expected U.S. core inflation data. Investors remain prudent about aggressively selling the dollar even though markets have brought forward expectations for the next Federal Reserve interest-rate cut, Unicredit Research analysts say in a note. "Indeed, the DXY dollar index remains slightly above 109, while the euro failed to extend its rebound above $1.03." The DXY trades flat at 109.049 and the euro rises 0.1% to $1.0298. (renae.dyer@wsj.com)

0754 GMT - The turnaround of gilts on Wednesday was "particularly impressive", with the 10-year gilt yields sliding 16 basis points by the time markets closed, say Citi Research's Jamie Searle and Jussi Harju in a note. This came after below-forecast U.K. inflation data increased prospects of the Bank of England cutting rates and marked the biggest fall in yields since late 2023, the strategists say. However, inflation risks haven't gone away. Wage growth data--due Tuesday--is arguably more important than CPI data for gauging the interest-rate outlook, they say. With U.K. inflation likely heading higher during the year, softer wage growth is essential to allow the Bank of England to lower rates. "Still, peak pessimism for gilts may have passed, for now." (emese.bartha@wsj.com)

Sterling could stay under pressure in the near term after U.K. economic growth data Thursday missed expectations, Monex Europe analysts say in a note. The data showed the economy grew 0.1% month-on-month in November after a 0.1% contraction in October but was below the 0.2% growth expected by economists in a WSJ survey. In the absence of further U.K. data Thursday, sterling will remain on the back foot in the near term, Monex analysts say. The currency remains vulnerable given concerns about U.K. fiscal policy and rising U.K. government bond yields, they say. GBP/USD falls 0.4% to 1.2200. EUR/GBP rises 0.3% to 0.8431. (renae.dyer@wsj.com)