Market Report : 01.02.23

Published: 01/02/2023 By ECAP

The Bank of England will be unveiling their latest policy decisions tomorrow, less than 24 hours after the Fed. Another 50bp rate hike is widely expected by economists, and indeed mostly priced in by markets, although the decision is once again highly unlikely to be unanimous. Analysts are pencilling in a few more dovish dissents among MPC members in light of the modest deterioration in UK activity data. Markets don't, however, believe that this will be enough to tip the balance in favour of a smaller hike, as most members will likely need to see clearer evidence of a sustained move lower in rates of inflation. Governor Bailey’s press conference, and updated economic projections, should be market moving, though suspicions are that the MPC will do its best to avoid rocking the boat too much.

Meanwhile, the European Central Bank is also expected to deliver another 50bp hike tomorrow. As this is fully priced in by markets, the euro will likely take its cue from the bank’s accompanying communications. Should the bank hint that another 50bp hike is likely on the way in March, and that further tightening should be expected in the coming months, the common currency could extend its recent rally against most currencies. On the other hand, were the ECB to give any reason to doubt its newfound hawkish stance, then the euro would likely give up some of its recent gains. Given the latest economic data out of the common bloc, particularly on core inflation and business activity, we think that the former is more likely.

Leading into today’s Fed meeting, the dollar was a touch stronger across the board yesterday morning. As is often the way, there was not really any clear catalyst for the spike higher in the dollar, which could be attributed to month-end flows more than anything else. At one stage yesterday morning, the euro was trading only just above the $1.08 level, although it did manage to rebound over the course of the London session. The Fed is almost certain to deliver a smaller, 25bp rate hike today - a move that has been heavily telegraphed by officials. There will be no macroeconomic or interest rate projections this week, so the reaction in the dollar will be almost entirely dependent on the Fed’s accompanying rhetoric, including chair Powell’s press conference.