The pound weakened on reports of slowing wage growth after Sterling had already lost ground on reports putting UK inflation at a three-year high. Analysts continue digesting the data for clues to navigating the unfamiliar economic road ahead. Today’s focus is on a UK household spending while tomorrow’s retail sales figures may bolster Sterling which is tenaciously refusing to yield further after this week’s losses.

The dollar dipped yesterday, but has recovered some of its recent strength, especially against the embattled euro. Yesterday’s positive Consumer Price Index increased the likelihood that US Federal Reserve (Fed) Chair Janet Yellen will endorse a near future interest rate hike at the Fed’s March meeting.

Pound Sterling – UK Markets

Yesterday’s labour market figures show that record-high employment figures reflect those entering the job market as well as the increasing numbers of those working beyond retirement age. Employment growth was driven by non-UK nationals who make up 10.9% of the workforce. Jobseeker figures only fell by 7,000 in the 3 months to December with a record employment rate of 74.6% that the Office of National Statistics (ONS) describes as ‘edging towards full capacity’. The weaker rise in wages suggest that employers are struggling to find more skilled workers. Factoring in the rise in inflation, real pay growth of 1.4% was the slowest in 2 years. The Joseph Rowntree Foundation warned that inflation puts millions at risk of poverty, saying their analysis found ‘4 million more people over the last six years have fallen below a decent living standard’.

The Bank of England decided to keep the polymer ‘fatty five pound’ note despite protests it contains traces of beef fat and will issue the £10 polymer note in September, as scheduled. The bank cited the cost of £46million for reissuing the £5 and £10 notes, adding they couldn’t ‘guarantee sufficient paper notes to replace destroyed polymer notes.’ The UK economy has had the benefit of consumer support, and tomorrow’s shoppers report might save the pound from decline if the UK retail sales month on month figures come in at or above an increase of 1%. Today ONS reports the average weekly spending is decreasing in pace with weakening consumer confidence.

US Dollar – US Markets

Fed Chair Janet Yellen’s testimony yesterday before the Congressional banking committee did nothing to dissuade market watchers that the Fed will make the first of its 3 rate hikes in March, despite a dearth of any concrete fiscal policy Trump has yet to unveil. The strength of yesterday’s data shot the dollar up for its longest winning streak in 5 years as it remained high for 11 days in a row before suddenly plummeting. The US’s five-year inflation surge indicates remarkable US consumer strength since the report on higher prices is accompanied by news that retail sales also smashed expectations.

The dollar’s unexpected reversal indicates investor jitters as storm clouds of political turmoil threaten Trump’s administration. The greenback’s rise after his orderly meeting with Japanese Prime Minister Shinzo Abe indicates the value of predictability to the marketplace. His National Security Advisor Mike Flynn’s resignation increased the risk factor associated with his presidency. Also, the drop in US Treasury yields was a factor in the sudden dip. Further, data release showed an unexpected fall in January industrial production to -0.3% after December’s rise to 0.6%. Trump’s election has contributed to the record highs of global stock markets, which is seen as worrying as is his ability to influence the markets as he devalued the Russian ruble with a single tweet.

Euro – European Markets

The euro has stabilised against the US dollar today, due more to the dollar having exhausted its gains than the euro strengthening. The single market currency has been at the mercy of political forces amid fears of Greece debt as upcoming elections bring the possibility of dramatic changes for the European Union. Today the European Central Bank’s release of their monetary policy meeting is a welcome antidote to speculation. The release typically yields little news, although, perhaps that trend is being altered given that January’s release included details regarding quantative easing and inflation and its expected that the central bank will stay on its current course until core inflation stabilises near 1.5%. Mario Renzi’s comments after the meeting will have investors’ attention.

France’s unemployment rate remains unchanged at 10% in the last quarter of 2016, welcome news for Front National party candidate Marine Le Pen who promises to put ‘France first’ in employment policies that include a tax on recruitment of foreign workers. Sweden’s January unemployment rate has risen from 6.5% to 7.3%. Italy’s global trade balance fell as its trade surplus widened in December from €5.80 billion in 2016 from €5.59 the previous year, exceeding market expectations of €4.0 billion. This was down to an increase of exports by 5.7%.

Other Currencies – Highlights

On 8 November, last year India’s demonetisation of 500 and 1,000 rupee notes wiped out 86% of the money in circulation in a cash reliant economy. Prime Minister Narendra Modi claimed his surprise move was designed to crack down on the black economy and cease funding terrorists but critics maintained Modi’s real motivations were political. His ‘notebandi’ (Hindu for stopping notes) was seen as an attempt to increase his party’s influence in India’s most populous state, Uttar Pradesh. However, notebandi’s impact savaged the economy, affecting every single Indian so negatively it appears likely his party will lose the March 11 election. And, this week, 100 days on from the move, a stockpile of counterfeit 2,000-rupee bills, the banknote Narendra Modi’s government introduced specifically to fight corruption has been seized by police in the largest counterfeit raid among a series of similar raids.

The rupee is recovering ground, with its highest rates against the dollar since that fateful November event; it hit a 3-month peak after the Reserve Bank of India’s February 9th decision to keep interest rates on hold. In its 15 February report, the Bank of India said that India’s year on year money supply grew by 6.7% on 3 February. Currency in circulation fell by 32.3% for the week when compared to the same week ending on 10 February a year ago, when it had grown by 13.2%. India is the world’s fastest growing economy, driven in part by Prime Minister Modi’s efforts to eliminate corruption, but it remains to be seen whether his efforts will bear fruit or be worth the extensive economic disruption.