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Market Reports : 03.01.23

Published: 03/01/2023 By ECAP

Sterling failed to gather strength on the final trading day of 2022, and investors found very little to cheer for in 2023 as the myriad of headwinds look set to continue. Many analysts have said that the cost-of-living crisis has been far worse than any year in the pandemic or the financial crisis, and fully expect this year to be the same. Further weighing on the UK economy, and in turn the Pound, is a fourth straight month of declining house prices. This reflects the longest run of slumping prices since 2008. Market analysts are fearing that house prices could continue to plummet as much as 10% over the next two years. Sterling seems unlikely to muster much strength amidst the maelstrom of headwinds keeping it under pressure as prolonged industrial action and downbeat economic forecasts could limit any gains.

European shares extended their run this morning as investors await consumer prices data from Germany, the region's largest economy, for clues about inflation in the euro zone. Investors are focussed on Germany's CPI data that could offer more cues on whether cost pressures in the euro zone have weakened after the European Central Bank's aggressive monetary policy tightening path. For now, German consumer prices, harmonised to compare with other European Union countries, are expected to have risen by 10.7% on the year in December in the preliminary reading, compared to an 11.3% increase in November. Ultimately, although the euro area economy is heading for a recession, concerns about gas supply over the winter have eased, meaning a downturn may not be as bad as feared a few months ago.

The US Dollar continues its hot streak as it starts the year with a positive push. The dollar edged up yesterday, pulling away from recent six-month lows against a basket of major currencies. However, sentiment remained fragile and the first trading day of the year was subdued, with many countries, including big trading centres such as Britain and Japan, closed for a holiday. Nevertheless, market participants will be looking ahead to a busy week of economic data and the release of the U.S. Federal Reserve’s latest meeting minutes. Today’s attention will be looking towards the S&P Global manufacturing PMI and construction spending, JOLTS data, as well as the minutes of the Fed’s latest policy meeting. Later in the week, ADP nonfarm employment and December’s nonfarm payrolls report will also be closely watched.