In the UK, macro data includes our latest look at consumer inflation, retail sales, and employment as well as the BOE Quarterly Inflation Report.
BOE Inflation Report
The BOE inflation report is a key release as it gives us a comprehensive look at what the central bank is thinking and projecting. Following the increase of the size of the Bank of England's quantitative easing program back in October it will be important to gauge the BOE's expectations for growth, as well as gauging the possibly of even more easing once this round of QE is over. We also want to gauge the bank's expectations for inflation, and when and how fast inflation is forecast to decline after having moved above the 5% level in September. Not only the report, but comments from BOE Governor Mervyn King - which follow the report's release - will be scrutinized for clues.
Here's the UK financial press' take on the report:
From Financial Times: The Bank believes firmly that inflation will fall rapidly next year, possibly even below its 2 per cent target rate, and this was the justification for its decision last month to pump an extra £75bn into its asset-purchase scheme to help the stalling economy recover.
The impact of such quantitative easing is not felt immediately, however, and the Bank is expected to focus on the deteriorating economic outlook and its negative impact on inflation in Wednesday's report.
We are expecting the inflation report to be dovish, with substantial downside risk to inflation, paving the way for a £50bn increase in the asset-purchase target to £325bn in February, says Stevyn Schutzman at RBC Capital Markets.
From The Telegraph: The Bank is expected to cut its 2011 and 2012 growth forecast to about 1pc from its August forecast of about 2pc when it publishes its latest quarterly Inflation Report on Wednesday. Sir Mervyn King, the Bank's Governor, is likely to emphasise there are serious downside risks to the UK growth outlook because of the threat posed by the eurozone's continued problems.
On the domestic front, the manufacturing PMI survey showed the sector unexpectedly shrank in October, boding ill for the economy in the fourth quarter. A squeeze on household incomes caused by low wage growth, high inflation and rising unemployment, as well as fiscal austerity, is also expected to weigh on consumer spending.
Such dovish expectations for the report already have the pound on the back foot as we begin this week with some risk aversion themes. With UK event risk pointing to the downside, the GBP should be pressured as we head into Wednesday's BOE Inflation Report.
UK CPI Expected To Remain Above 5% Annual Rate
Prior to the Inflation Report on Wednesday, the UK posts data on inflation for the October period on Tuesday (4:30AM ET, 09:30 GMT). The annual rate is expected to hover above the 5% level, coming in at 5.1% following a 5.2% reading in September. While the Bank of England has said repeatedly that inflation would go above the 5% annual rate and then decline, the longer inflation stays above 5%, the more it eats away at consumer confidence as well as real GDP growth.
As mentioned above in the Financial Times article the central bank actually projects inflation to fall below its 2% target in the medium-term. If we see inflation coming in weaker than expected that could bolster the case for that assessment and would therefore be bearish for the pound. However, if inflation comes in stronger-than-expected that could undermine the case for further easing of monetary policy. A higher inflation rate will also at the same time add to the pressures on the UK economy in terms of pushing down consumer spending. Therefore, it may be a lose-lose situation for the pound when it comes this report, though a stronger reading would perhaps limit further easing which is a pound positive.
While inflation has been a problem since the beginning of 2010, the labor market has come under increased strain in 2011.
Above is a look at the monthly claimant count and as you can make out during 2011 we have seen the indicator move above the zero level, meaning more Britons are asking for unemployment benefits after losing their jobs. The forecast for October is for another 20.8K British workers to claim unemployment benefits. That would follow a 17.5K increase in September.
The unemployment rate meanwhile is expected to climb to 8.2% in September from 8.1% in August. Therefore, we see the continued deterioration in the labor market which is a major factor for the central bank conducting its second round of quantitative easing announced in early October. With austerity measures by the government aiming to slash public payrolls, and economic growth to slow, it will be tough for the private sector to take in the new unemployed and as a result the picture for the labor market remains negative.
If the claimant count comes in better-than-expected, that is a smaller figure than the 20.8K expected that could be a positive for the pound. However, as long as the indicator continues to post negative figures it should weigh on the pound in general. However, in the opposite scenario in which we see the claimant count coming in larger than expected, the pound will be pressured.
UK Retail Sales
The weak labor market along with persistently high inflation is a double whammy to consumers. We get the latest reading on retail sales from the UK this week as well which confirm that pressure. Sales are forecast to have declined 0.3% in October following a 0.6% increase in September. Earlier in the month we saw the BRC retail sales index down 0.6% y/y in October, following a 0.3% y/y increase in August. Therefore, the government's forecasts for weaker spending are in line with the BRC (private) indicator. Such a reading would show that UK consumers retrenched during the month amid higher unemployment, stagnant wages, high inflation, and financial turmoil as a result of the European debt crisis.
Here's a look at UK retail sales and as you can see its been pretty erratic over the last year:
Impact on GBP
This mix of reports should weigh on the GBP.
If the indicators were to hit expectations we are looking at another month of annual inflation above 5%, another increase in the number of Britain's unemployed, and a drop in consumer retail spending. Along with the important BOE Inflation Report which is expected to show the central bank cutting its growth forecasts, it is shaping up to be a bad week for the pound.
If we see a string of releases that beat expectations, that would help change the conversation, but the underlying strains on the economy remain and unless we get some blowout figures it's going to be tough to change that narrative.
At the same time the pound has been sought recently as a safe haven alternative during periods of risk aversion and so it has been stronger against the Australian, New Zealand and Canadian dollars over the last few weeks. Therefore it depends on the type of general risk sentiment we have in the markets to gauge the pounds reaction against other higher yielders.
If risk sentiment is generally negative we should look for the pound to weaken against the dollar and yen though it may still strengthen against the Australian and New Zealand dollars. We'll see if the UK fundamental data this week can break that recent pattern of GBP strength during risk-off periods or not. On the flip-side if risk sentiment is generally positive than the pound may come off its recent levels against higher-yielding currencies, especially if its data disappoints.