The focus this week shifts back to macroeconomics, including US inflation on Tuesday, the UK inflation report and industrial production in the Eurozone, out on Wednesday, and retail sales in the US, out on Thursday. The publication of the ECB minutes and speeches by central bank officials on both sides of the Atlantic should also provide some volatility.

GBP

Governor Mark Carney signalled a more dovish outlook from the Bank of England last week. While the initial impact on sterling was limited, the pound has sold-off sharply this morning after MPC members Tenreyro and Vlieghe sounded a similar note over the weekend.

We do, however, think market pricing of a cut in the medium term is not yet justified. We look to the latest inflation numbers on Wednesday and other second-tier releases to provide evidence that the economy is on firmer ground now that uncertainty over Brexit is much diminished. The large upward revision in the PMIs of business activity we saw last week already points in this direction. We remain positive on the pound’s medium-term prospects.

EUR

The turn for the better in Eurozone economic data has gone remarkably unreported, in our view. Last week, the December PMIs underwent a large upward revision, and the composite index is now firmly back in expansionary territory. Retail sales data was also strong, and core inflation at 1.3% remains at the top of the recent range.

Negative European rates continue to weigh somewhat on the common currency. We think the ECB minutes for the December meeting this week may alleviate market concerns about further cuts or increase in QE from the central bank, providing modest support for the common currency.

USD

The labour market report for December provided the best of both worlds for equity markets, with job creation modestly above labour force growth and no sign of wage acceleration. This data pushes any prospect for policy tightening further and further into the future, and risk assets in general are reacting accordingly.

This week’s critical data point will be CPI inflation, out on Wednesday. The core index excluding volatile food and energy components should remain above the Fed 2% target, but without evidence of acceleration in wage growth we expect the central bank to look through this data.