I have been expecting the GBP to fall, but recently high inflation numbers have pushed the currency up. I think that the BoE is unlikely to hike rates and that the market is putting too much weight on the inflation numbers, but I have not shorted the GBP because it has been moving in the wrong direction. However, today a very weak number for Q4 GDP — down 0.5% vs. an expectation of up 0.5% — has pushed the currency down. This could be a game-changer for the market’s expectations. This is only the preliminary estimate for GDP, of course, but the important thing is that the number is so bad that it could change the narrative. And the UK is the only region for which data has been generally disappointing recently.

The EUR has been rising on a combination of hawkish comments from Trichet, expectations for a new Eurozone bailout agreement, and improving data flow. I do not think that that the ECB will actually raise rates, but and it has been trying to manage down the market’s expectations on that score, but the good data flow is real, preliminary Q4 GDP estimates are not due until mid-February (so any downside surprises on that score are a good fortnight away), and Wolfgang Schauble has said a new Eurozone agreement should be worked out by March, which gives over a month for the market to keep getting optimistic about it.