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GBP/EUR still above 1.20

GBP/EUR still above 1.20

The euro rallied to $1.3150 against the dollar as markets decided that further progress on a Greek debt write down was being made and this saw a rise in investor confidence – particularly on the Dow Jones.

UK retail sales have been extremely volatile as of late. Headline sales rose by 0.6% in December having fallen by 0.5% in November. The underlying picture was of sharply rising sales in the fourth quarter of last year, helped in part by discounting by retailers. Both the BRC and CBI Distributive Trades surveys point to some moderation in January, with a dearth of discounting keeping consumers away. However, warmer weather may have boosted gasoline sales as the winter freeze came later than expected this year. For this reason we look for headline sales to fall by only 0.1% on the month, against a consensus call for a 0.3% dip. We are in line with consensus for underlying sales, looking for a 0.3% fall which would see the annual growth rate slow from 1.7% to -0.1%.

Rising gasoline prices are likely to lift headline US inflation in January. The market is looking for a 0.3% rise on the month, with gasoline providing around 0.13pp to that monthly increase. Rising petrol prices will also boost the February CPI as well widening the gap between headline and core inflation. The latter is only expected to rise by 0.2% but we suspect that a 0.1% increase is more likely. Core inflation has been tempered by moderating rent inflation which has reacted to a rise in vacancies. Cotton prices, which rose sharply, last year have also stabilized so clothing prices will also weigh down on core inflation. Easing core inflation could help boost real GDP growth later this year should nominal demand hold up as expected.

The Conference Board amended their Leading Economic Indicator recently in order to better align it with GDP growth. It is still too early to tell whether they have been successful, but markets are looking for a 0.5% rise in January, which would be consistent with the US economy growing at a 3% annual pace this year. An increase in hours worked, rising equity prices and the shape of the yield curve. A rise in January would be the fourth consecutive monthly gain and we fully expect to see a further rise in February. That would be consistent with the idea that the US economy has continued to strengthen in the first quarter which provides some upside risk to our 2.4% GDP forecast for 2012.

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