Market Report : 02.03.23

Published: 02/03/2023 By ECAP

Sterling was back under pressure yesterday, by remarks from Bank of England Governor Andrew Bailey, who said "nothing is decided" on future rate increases which had traders trimming back bets on higher rates. A sobering start to March for the pound served as a timely reminder that the politics surrounding Brexit is a minor issue for the currency and the economy, while interest rate expectations are sat in the driver's seat. Bailey indicated the prospect of a further rate hike is close to 50/50 and entirely dependent on data to be released ahead of the 23rd of March. Whilst the Bank of England is coy about the need for further rate hikes, the European Central Bank and the Federal Reserve are clear in their determination to keep pushing rates higher.
The Euro was boosted by yesterday’s German inflation report as the rising cost of living has further raised hike expectations in the euro zone. Moreover, figures released on Tuesday, showed accelerating inflation in France and Spain, two of the euro zone's biggest economies. This puts a lot of attention on the preliminary Eurozone consumer price index for February later in the session, with median forecasts pointing to an annual figure of 8.2%, a drop from 8.6% the prior month. However, with hotter-than-expected German inflation in February adding to pressure on the European Central Bank to raise rates after unexpectedly strong readings in France and Spain, markets are bracing for another uncomfortably high reading.

The US dollar fell across the board yesterday, weighed down by firmer commodity currencies that benefited from China's strong manufacturing activity data. Nevertheless, the US dollar rose in early European trade this morning, regaining its firm footing against a basket of currencies. The dollar has been supported by higher US Treasury yields, helping the greenback rebound after logging sharp overnight losses. This followed Minneapolis Federal Reserve Bank President Neel Kashkari suggesting that a 50-basis-point rate hike at the US central bank's next meeting later this month was still a possibility. Ultimately, the market is now pricing at a higher peak of 5.5% for the Fed's policy rate in September, a considerable leap up from the current range of 4.5% - 4.75%.