Sterling, Gilt Yields Edge Slightly Lower After U.K. PMI Data — Market Talk

Sterling is likely to rise modestly against the euro this year due to the Bank of England's more cautious stance on cutting interest rates compared to the European Central Bank, Danske Bank analysts say in a note. The BOE is likely to stick to a gradual pace of policy easing with quarterly rate cuts, they say. This is amplified by the U.K.'s expansionary fiscal stance. "We expect the expansionary fiscal stance and a loosening of monetary conditions to boost the [U.K.] economy in 2025." The U.K.'s better growth outlook compared to the eurozone add support to sterling. EUR/GBP rises 0.1% to 0.8288 but Danske expects it to fall to 0.81 within six months. (renae.dyer@wsj.com)

Sterling's outlook looks uncertain amid U.K. inflationary pressures, weak growth and geopolitical developments, fintech group FlowCommunity's Tito Iakopa says in a note. Persistent elevated inflation could force the Bank of England to halt interest rate cuts, he says. However, weak economic indicators including sluggish services activity and low consumer confidence add uncertainty to sterling's outlook. On the geopolitical front, ongoing efforts to resolve the Russia-Ukraine conflict could boost risk sentiment and sterling. "Conversely, any setback could dampen investor sentiment, benefiting the dollar." U.K. retail sales data, U.K. purchasing managers' surveys and the GfK U.K. consumer confidence survey on Friday will be key for sterling. GBP/USD falls 0.2% to 1.2585 and EUR/GBP rises 0.1% to 0.8288. (renae.dyer@wsj.com)

The rise in the German ZEW index on Tuesday was likely due to improved investors' sentiment on expectations for a market-friendly change in government with Sunday's parliamentary election, but it doesn't seem to mirror any real change in sentiment on growth, said ING.

The euro continues to follow sentiment on the implications of Russia-United States talks, and the bank is starting to observe some signs of relative underperformance of European currencies that it suspects will be exacerbated by U.S. President Donald Trump's more transactional approach to European NATO allies.

ING's short-term fair value model continues to show zero risk premium — in other words, undervaluation — on , suggesting more downside risks related to a repricing of U.S. protectionism risk into foreign exchange.

The bank wrote in a note it could see the correction run until 1.040 this week.

Wednesday's release of January's United Kingdom inflation data has had little impact on sterling (GBP), stated ING. The headline consumer price accelerated to 3.0% year over year, just above the bank's 2.9% forecast and the consensus of 2.8%.

However, this is primarily due to an unexpected surge in food prices in January, and markets are attaching little weight.

Services inflation came in marginally lower than expected at 5.0%. Although this marks a 0.6% acceleration from last month, December's figures were artificially low due to improper measurement of Christmas airfares.

More significantly, ING's measure of core services, which excludes volatile items — including airfares — and rents, has shown steady improvement, now at 4.2%, down from 4.7% two months ago. The bank expects this benign trend in services inflation to persist in Q2 and support ING's projection of one rate cut per quarter this year.

broke below 0.8300 on Tuesday as the euro continued to show idiosyncratic underperformance likely linked to the European Union's geopolitical isolationism relative to the U.S., according to the bank. ING pointed out it would be careful picking a bottom in the pair just yet, and a move to 0.820 isn't out of scope.

In the longer run, the bank deems at least 25bps worth of dovish repricing is due in the GBP curve, which should offer some support to .

Sterling rises but only modestly after Wednesday's higher-than-expected U.K. inflation data. This reaction reflects the finer details of the report, ING analyst Francesco Pesole says in a note. Headline inflation rose to 3.0% year-on-year in January but primarily due to an unexpected surge in food prices and markets are "attaching little weight" to this data, he says. Services inflation was also marginally lower than expected. This "benign trend" in services inflation could persist in the second quarter and supports the case for the Bank of England to cut interest rates once a quarter this year, he says. Sterling rises only marginally versus the dollar and euro after the data, last at $1.2621 and 0.8279 per euro. (renae.dyer@wsj.com)

Sterling is little moved even after data showed U.K. inflation accelerated more than expected in January. Inflation increased to 3.0% year-on-year in January from 2.5% in December. Economists in a WSJ survey expected 2.8%. Core inflation rose to 3.7% from 3.2% a month ago, as expected. The introduction of VAT on private-school fees, rising fuel prices, air fares and bus fares were "always likely to drive prices up," Raymond James Investment Services strategist Jeremy Batstone-Carr says in a note. The Bank of England could view rising inflation as temporary but Wednesday's data suggest the next interest rates cut is some way off, he says. GBP/USD trades at 1.2618 and EUR/GBP is at 0.8286, little changed after the data. (renae.dyer@wsj.com)

Sterling's gains following Tuesday's U.K. labor market data are unlikely to last, Monex Europe analysts say in a note. The data delivered a set of marginally better-than-expected figures. However, given concerns surrounding the quality of this data, "we are disinclined to read too much into this latest round of data," they say. Wednesday's U.K. inflation data should prove more significant for markets. This could come in lower than expected and weaken sterling, they say. EUR/GBP falls to a two-week low of 0.8291 after the data, from 0.8303 before the data, according to FactSet. GBP/USD rises to 1.2610, from 1.2601 beforehand.(renae.dyer@wsj.com)