Published: 16/01/2023 By ECAPSterling gained 1.11% against the US dollar last week, causing cable to close at its highest level since mid-December. This comes despite some disappointing local economic data: UK Industrial production and manufacturing production both surprised lower for the month of November. Looking forward, investors focus will shift to UK employment data on Tuesday and UK CPI data on Wednesday. Headline inflation is seen softening to 10.5% y/y in December from 10.7% prior. The core gauge is estimated at 6.2% y/y, down from 6.3% prior. Today’s focus now shifts toward the Bank of England Governor Andrew Bailey’s testimony before the UK Parliament's Treasury Select Committee, due at 15:00 GMT. The bias here would be that upside data surprises would help the Bank of England maintain a hawkish stance relative to the Fed, thus, further supporting sterling.
European stock markets are expected to trade in a mixed fashion this morning, at the start of a week that includes important inflation data as well as the return of the World Economic Forum to Davos. The World Economic Forum returns to the Swiss ski resort of Davos this week, with European Central Bank President Christine Lagarde and German Chancellor Olaf Scholz among the dignitaries expected to attend the glitzy affair after a pandemic-influenced three year absence. Looking into today’s economic calendar, this morning’s data showed German wholesale prices fell 1.6% on the month in December, a welcome retreat. That said, the early focus this week is likely to be on the tomorrow’s release of Germany’s ZEW survey of economic sentiment for January. This is expected to show an improvement to -15.5 from -23.3 in December. Ultimately, both the Euro as well as European equities have benefited from this boosted sentiment.
The US dollar stabilised this morning, trading just above a seven-month low on rising expectations that the Federal Reserve will slow the pace of its interest-rate hikes. The Dollar Index edged up to 101.98, just above levels not seen since early June last year, although volumes are limited with U.S. markets closed for the Martin Luther King Jr. holiday. The dollar is down well over 1% so far this year, with last week’s U.S. CPI data showing inflation fell for the first time in more than 2-1/2 years in December. This seemingly confirmed earlier impressions that inflation is on the retreat, which has led to expectations that the U.S. Federal Reserve is nearing the end of its rate-hike cycle, and that rates will not go as high as previously feared. Looking forward, the main U.S. economic release this week will be Wednesday’s U.S. retail sales. They posted their largest decline in 11 months in November and a similar drop in December would further add to expectations that the Fed will cool its aggressive rate hikes to avoid more damage to the economy.