FX Daily Strategy: Europe, January 17th

AUD disappointed by Chinese data 
USD gains look a little overdone 
GBP risks remain slightly on the downside

First up on Wednesday is the Chinese Q4 retail sales, industrial production and GDP data, which may set the tone for risk sentiment. Soft Chinese data, notably CPI, has been slightly negative for global risk sentiment this year, with the AUD in particular struggling as a result. The AUD/USD dip below 0.66 on Wednesday took it to its lowest in more than a month, but it remains well above the level consistent with the correlation with Chinese equities that held for much of the last couple of years. Even so, yield spreads do suggest some upside risk, so if the Chiense data are strong, there may be scope for recovery. However, China Q4 GDP which came in slightly lower than 5.3% estimate at 5.2% despite improving from 4.9% in Q3, it shows a 1.0% q/q improve which meets estimate. Overall, it meets thew Chinese government goal of 5% growth but is not the bright economic data market looking for. The other Chinese activity data showed a mixed picture which is in line with the ongoing scenario in China. Regional equities are subsequent lower on downbeat Chinese growth sentiment, giving the Aussie little support. 

US retail sales is the main US data on Wednesday. We expect a 0.4% rise in December retail sales, with gains of 0.3% both ex autos and ex autos and gasoline. The data will show that consumers still have some momentum, though Q4 will be slower than the strong Q3. Our forecast is marginally stronger than consensus, but probably wouldn’t have any noticeable market impact. USD strength persisted through Tuesday trading in spite of a very weak Empire manufacturing survey. This is a choppy series but the survey was the weakest since the pandemic. Nevertheless, it didn’t prevent a strong rise in US yields and a consequent rise in the USD. USD strength looks overdone given this sort of data, but the rise in yields may to some extent be reversing the decline after PPI last week, which looked overdone and may have been long weekend related. For now, it’s hard to oppose the USD’s strength, but we would see USD/JPY in particular as being too high here relative to yields. 

UK CPI is the focus for European markets on Wednesday. There wasn’t any big reaction to Tuesday’s labour market data, which was marginally on the soft side, but there is still scope for GBP to weaken here as it has been trading on the high side relative to the correlation with yields. Superimposed over both upside and downside surprises, UK headline and core inflation have been on a clear downward trajectory in the last few months, with the former having peaked above 10% in February and the latter at 7.1% In May. This trend continued in November with CI down markedly to a 27-month low of 3.9%, while the core slid lower by a further 0.6 ppt to 5.1%, a 23-month low.  In the December CPI figures we see both slipping further but by only 0.1 ppt for each, but with downside risks, while more disinflation signs may be evident in the accompanying PPI numbers. Our forecast is in line with market consensus, so we wouldn’t expect a big reaction, but see risks as weighted to the GBP downside.