Week ahead: UK inflation to guide sterling moves

Inflation remains top of mind for investors grappling with the uncertain macro backdrop to equity markets. UK inflation figures are out this week with a big focus on whether that will force the Bank of England into a more aggressive tightening cycle. Meanwhile we get a gut check of the US consumer with retail sales and Walmart earnings due up. The week ends with the Australian elections, which could have market-moving results. 

UK inflation 

Consumer price index inflation for the UK will be the main event for many in the forex markets as they grapple with sterling’s sharp decline against the dollar in recent weeks. The Bank of England raised rates this month but a gloomy economic outlook and a suggestion that it could pause interest rate hikes this year has not helped sentiment towards the pound.  

Could a rise in inflation spark a renaissance for sterling bulls? It’s hard to see much uplift even if inflation spikes, since the BoE has indicated that soaring inflation risks recession. Fuzzy logic but one policymaker at least has been sounding quite hawkish. 

Speaking last week, policymaker Dave Ramsden said there is a risk that inflation remains elevated for a lot longer than hoped. “Certainly, on the basis of my current assessment of prospects, we’re not there yet in terms of how far monetary policy has to tighten,” he said, adding: “Given what we know about the UK labour market, I wouldn’t be surprised if it turned out to be a bit tighter … I think there are upside risks on inflation the medium term.” 

US retail sales 

Gut check for the US consumer with retail sales data for the month of April. Rising inflation and the absence of stimulus cheques has reined in consumer spending a touch. Although March data showed an uptick in spending, this was largely down to higher oil and gasoline prices. Excluding petrol station receipts, sales fell 0.3% as vehicle and e-commerce purchases, the two-largest spending categories, fell. 

MasterCard data indicates total retail sales excluding autos increased +7.2% year-over-year in April and +15.3% compared to pre-pandemic spending (2019), not adjusted for inflation. So retail sales running below the 8.3% inflation rate does not indicate fantastic growth or confidence among consumers. Meanwhile, investors will also be watching for the next quarterly earnings from Walmart.  

Australian elections 

Australia’s elections are taking place on Saturday and could have important ramifications for the market. Whilst the Australian dollar could be sensitive to any change in government spending, it’s much more sensitive to the RBA, what the Fed is doing and trade flows with China in particular. The most obvious candidates for a move are the miners and basic resources stocks. Labour has pledged to cut emissions far quicker than the centre-right Liberal National coalition government has so far committed to. Scott Morrison’s government slipped further behind the opposition Labor party in opinion polling as early voting began last week. Stay tuned for a more detailed update on the Australian elections from our expert Helen Thomas of BlondeMoney. 

Earnings Season 

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