The United Kingdom’s GDP unexpectedly increased by 0.1% in December, attributed to the World Cup. The unexpected GDP growth raises the question of whether the Bank of England will pursue more aggressive interest rate hikes in response to inflation. BoE Governor Bailey’s speech on Monday covered the overall state of economics in the UK. He stated that the risk premium on UK assets since September is “pretty much gone”, but that confidence remains fragile post “Trussencomics.” This week, including Average Earnings, CPI, and Retail Sales, may provide direction for the pound.
The European Central Bank continues hinting at interest rate hikes in the coming months. The reopening of China has positively impacted the euro. Eurozone final CPI and speeches by ECB President Lagarde later this week may provide insight into whether she will maintain a hawkish stance and strengthen the euro.
The drop in US inflation has overshadowed recent weak Services PMI data for the United States to a 12-month low of 6.5%. Philadelphia Fed President Hawker has stated that he believes rate hikes of 0.25% are appropriate in the future, which may lead to a potential weakening of the US dollar. The dollar strength hinges on FED policy which may taper off as early as March, meaning there will be an abundance of dollar sellers. Retail sales data, set to be released on Wednesday, may provide insight into the performance of the US economy during the holiday season.