Published: 03/03/2023 By ECAPSterling seems to have retraced some ground from the weekly lows seen on Wednesday, as it prints the first daily gains in four during this morning’s early European trade. In doing so, Sterling pays little heed to the Brexit-negative headlines, as well as mixed comments from multiple Bank of England officials. Last month the BoE forecast that Britain was likely to see a shallow but fairly long recession, lasting more than a year, as households and businesses reckoned with the after-effects of last year's surge in energy prices. However, Britain's economy is showing slightly more momentum than expected and pay growth is proving a bit faster than previously forecasted.
The Euro has been consolidating its recent gains following the release of inflation figures in the eurozone. Inflation has come in higher than expected this week, pointing to more interest rate hikes by the European Central Bank, on top of the 50-basis points that have already been signalled for mid-March. Yesterday, ECB President Christine Lagarde announced that interest-rate increases may need to continue beyond the planned move, as policymakers will do everything to return inflation to the 2% target from the current above 8%. This, in turn, has seen Morgan Stanley raise its forecast for the ECB’s terminal rate to 4%, from its earlier prediction of 3.25%, citing the region’s hot inflation numbers.
The US dollar weakened in early European trade this morning amid uncertainty over the extent of the Federal Reserve’s future tightening path. In fact, the dollar index is on course to fall 0.4% this week, which would be the first losing week since January. Taking some steam out of the dollar and the breathless advance in US yields were comments from Atlanta Fed President Raphael Bostic that "slow and steady is going to be the appropriate course of action," despite new labour figures adding to the run of strong data of late. Ultimately, the outlook for USD will continue to depend critically on whether bonds and equities can rally together (as appeared to be happening in January) or whether we remain in the bearish environment that dominated 2022.