Sterling Gains as Market Eye Key Mixed UK Economic Data

Sterling is treading water following this morning's ONS release, while the 5.1% unemployment rate confirms a cooling labour market, the focus has shifted to whether stagnant GDP growth through Q4 will force the Bank of England’s (BoE) hand in February. Slower wage growth has eased inflationary pressures but has clouded the outlook for consumer demand. Markets now await CPI and retail sales data for further evidence of disinflation and clues on the timing of a rate cut. UK equities are trading in a narrow range with thin headline momentum, as traders parse incoming economic data for signs of policy inflection.

Sterling’s subdued trade underscores a cautious domestic backdrop.

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GBP/JPY DRIVEN BY YEN DYNAMICS AHEAD OF JAPAN POLITICS

GBP/JPY climbed above 212.82 as the yen weakened amid renewed political risk and bond-market repricing. The yen is caught in a fiscal–monetary tug of war. Prime Minister Sanae Takaichi’s proposal to suspend the 8% consumption tax on food for two years has raised expectations for reflationary fiscal expansion, while 10-year JGB yields hit 27-year highs. Markets are pricing in higher government spending and a rising debt load, pressuring the yen as the Bank of Japan (BoJ) maintains its ultra-loose policy stance. Political developments have overtaken currency fundamentals as the primary driver, with yen weakness supporting gains in GBP/JPY and tempering traditional safe-haven demand. The upcoming (BoJ) meeting is creating more uncertainty. Policymakers will likely keep rates unchanged, but markets are watching for hints of future tightening. Fiscal expansion could make things harder for the BoJ if inflation expectations rise. Japanese equities remain under pressure, with the Nikkei and Topix extending declines as rising bond yields weigh on valuations and highlight concerns over policy coordination. Exporters have seen limited benefit from yen weakness amid subdued global risk appetite.

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STERLING RISES AGAINST THE DOLLAR AND US DATA IMPACT

Sterling trades near the mid-1.3400s against the dollar, underpinned primarily by broad dollar softness rather than UK-specific momentum. The dollar maintains a modestly softer tone on the GBP/USD axis, as market attention remains split between UK macro releases and US inflation data that have left the Fed on hold. December US CPI came in at 2.7% YoY, in line with forecasts and reinforcing expectations for steady Fed policy at the January meeting. Markets reflect a modest shift in sterling positioning, with GBP/USD drawing support from a pullback in the US dollar index as expectations for Fed rate cuts move further out. Softer risk sentiment, shaped by ongoing geopolitical and economic uncertainty, has also contributed. Dollar liquidity remains firm, and significant moves in headline rates are unlikely absent decisive signals from upcoming US PCE or labour market data. The market’s focus now shifts to producer price trends, PCE inflation, and preliminary PMI data for cues on growth and inflation durability. A run of weaker US data would likely revive rate cut expectations for the Fed, while stronger releases should reinforce current pricing and keep the dollar supported. In the near term, volatility is more likely to result from unexpected data than from central bank actions. UK employment and inflation data are most likely to affect sterling, while developments in Tokyo continue to influence yen crosses. The US dollar remains comparatively resilient but cautious on policy. Sterling trades defensively but is stable, the yen absorbs political risk, and the dollar consolidates as market investors recalibrate rate expectations.

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