MUFG highlights an upcoming critical week for the British economy, with a series of significant data releases that could test recent hawkish adjustments in Bank of England (BoE) policy expectations. The labor market report, January's CPI, and Q4 GDP figures will be closely watched. The BoE's projection of a rebound in inflation in the latter half of the year, coupled with the necessity for core and service inflation to decrease swiftly, will play a crucial role in shaping market expectations for the BoE's rate decisions. Early indicators suggest a potential uptick in growth at the year's start, following a possible mild recession at 2022's end. MUFG maintains a bearish stance on EUR/GBP, predicting further sterling strength in the near term, targeting a move towards 0.8275.
BoE Policy Repricing: The upcoming UK economic reports serve as a litmus test for the recent hawkish reevaluation of BoE policy expectations.
Inflation and Wage Growth: For the market to anticipate earlier and more significant BoE rate cuts, there would need to be an unexpected decline in core and service inflation and a slowdown in wage growth at the year's start.
Economic Growth Indicators: Preliminary signs point to a recovery in growth at the beginning of the year, contrasting with a potential mild recession at the end of the previous year.
Short EUR/GBP Strategy: MUFG continues to favor the pound over the euro in the short term, maintaining a trade idea that bets on EUR/GBP's decline to 0.8275.
MUFG's analysis underscores the importance of the upcoming UK economic data in shaping BoE policy expectations and the GBP's trajectory. The firm remains short on EUR/GBP, anticipating further pound strength based on early indicators of economic recovery and the potential impact of forthcoming economic reports.