Cable trended lower last week, despite better-than-anticipated monthly GDP figures. Part of that can be attributed to gains in the dollar, which outweighed the impact of the British data. On the other hand, traders and economists might be looking beyond the economy towards the two issues central to BOE policy: inflation and the jobs market.

Last week’s GDP figures were notable because they reversed the quarter’s trend entirely. Before the data was out, the expectation was for a negative Q4. The data showed November GDP rising 0.3%, while October was revised from -0.1% to flat. Part of the reason for the market dismissing the data is that the unexpected increase was attributed in part to a resumption of operations at Jaguar, a transitory event.
 

So, What Happened to the Budget?

One takeaway from the GDP data could be a reassessment of the impact of the Autumn Budget. Analysts had suggested that businesses were likely to hold off in November due to concerns about the measures the Chancellor would announce. But the surge in activity shows those fears were misplaced.

That could also apply to concerns about Britain’s ability to make payments. The UK has the highest yields among major countries, which has been widely attributed to the high debt and narrow fiscal headroom. A surprise surge in the economy would suggest that the government has more room to make payments than had previously been expected. The market’s muted reaction to the data suggests that concerns about economic growth might have been exaggerated. But that means the upcoming data will likely carry greater importance for the market.
 

UK Inflation and Rate Outlook

Late last year, the BOE suggested that inflation had already peaked, which justifies further easing. In fact, Governor Andrew Bailey suggested that inflation would return to the 2.0% target by April or May. But, markets don’t appear to be convinced. For now, futures are barely pricing in two rate cuts for the entire year. This is less generous than economists are expecting, with as many as three cuts.

Markets will be looking to see whether price pressures not only declined but also accelerated to meet the BOE’s forecast. If that were the case, the pound could weaken as traders bring forward their forecasts of a rate cut. At the moment, the market doesn’t foresee a rate cut until June. If the data suggests price pressures remain, then the market could price out one of its expected rate cuts. However, as with the GDP data, this might not provide much of a boost to the pound, as higher rates would likely weigh on economic growth.
 

What to Look out For

First up on Tuesday is the release of UK jobs data. The unemployment rate for November is expected to stay unchanged at 5.1%. Markets might focus more on the claimant count data, since it’s for December and “fresher data”. The consensus among analysts is for the claimant count number to be in line with the prior month at 20.5K vs 20.1K in November. Remember that the claimant count represents new people seeking unemployment assistance, so a higher number would indicate increasing slack in the jbos market.</p>

The UK December CPI data is due on Wednesday, with both the headline and core rates expected to decline to 3.1% from 3.2% previously. BOE doves have argued that falling energy prices and trade diversion due to US tariffs will help bring down inflation in the near term.

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