February has been challenging so far for GBP, as it has appreciated against less than 40% of its global counterparts, a notable contrast to the over 70% increase observed in January. Despite this, a modest rebound in GBP demand on Tuesday allowed GBP/EUR to reclaim 1.17 and GBP/USD 1.26.

Rate differentials remain relatively unchanged, with the Bank of England (BoE) not anticipated to cut interest rates as extensively as the ECB or Fed in the coming year. However, there is a growing disparity in economic surprises, reflecting the variance between consensus expectations and actual data.  Over the past month, the UK has experienced more disappointing economic surprises compared to the US and Eurozone, potentially contributing to the recent weakness in GBP.  Elevated concerns about stagflation in the UK, particularly due to persistent services inflation, further contribute to this trend, albeit lagging behind the declines observed in the US and Eurozone.  Some argue that this situation supports the idea of higher BoE rates for a more extended period, offering GBP a yield advantage, as witnessed in January.

Nevertheless, the most dovish member of the BoE's interest-rate-setting committee, who advocated for a rate cut last week, warned that the current weakness in the UK economy poses a risk of a significant shock if restrictive interest rates are maintained. The upcoming UK inflation report, scheduled for next week, could play a crucial role in shaping market sentiment. If the report indicates a resumption of the descent in inflation after the surprise uptick in December, it may lead to a dovish repricing in UK rates, exerting additional downward pressure on the pound.

While the UK's data docket is relatively thin this week, recent retail sales data from the British Retail Consortium revealed a 1.4% increase on a like-for-like basis in January 2024 compared to a year ago, marking the second consecutive month of slowing growth.