Sterling marginally firmer

Yesterday was an extension of last week in FX markets with the main currency pairs again largely unchanged. It’s more or less the same this morning ahead of key US inflation data later today, though sterling is marginally firmer following the release earlier of slightly stronger than expected UK labour market data, trading close to 85p to the euro and at $1.2650 against the dollar. The single currency, meanwhile, continues to hover below $1.08 against the US currency.

It was quiet enough in government bond markets yesterday too with yields a touch lower following last week’s sharp increase, while UK yields have popped higher this morning on the back of the labour market numbers. In equity markets, European stocks extended their recent gains, adding around 0.7%, while the main US indices closed flat to marginally higher.

Unemployment in the UK fell to 3.8% in the final quarter of 2023 according to this morning’s data, below the consensus forecast of 4% and down from 4.1% in the third quarter (and also slightly lower than in the corresponding quarter in 2022). The annual rate of growth in average weekly earnings (excluding bonuses) decelerated further in Q4 to 6.2% (from 7.8% in Q3), and though this was slightly ahead of the consensus forecast (6.0%), the Bank of England will undoubtedly welcome the continuing deceleration in wage growth.

Today’s CPI data in the US are expected to show the headline and core rates of inflation dipping to 2.9% and 3.7% respectively in January according to the consensus forecast, down from 3.4% and 3.9% in December. The Fed has said it needs to see continuing “good” data to be more confident that inflation is on a sustained path back towards target, and before it can cut interest rates, so clearly today’s numbers are especially important.