Published: 05/01/2023 By ECAPSterling struggles to find a clear direction as yesterday’s data reading evidenced further proof of a cooling UK housing market. Mortgage approvals fell to their lowest level since June 2020 in November. Today’s attention will shift to services and manufacturing output data, which will likely add to all-round proof of a cooling economy. Nevertheless, in the US Federal Open Market Committee minutes released yesterday, economic cooling was the trend on both sides of the Atlantic. Amid these data points, the pound was able to modestly retrace part of Tuesday’s intra-day losses and close yesterday’s session 0.75% higher.
The Euro, as well as European stock markets, are expected to open marginally lower this morning, as investors digest the broadly hawkish tone from the minutes of the last Federal Reserve meeting ahead of the release of key Eurozone inflation data. For now, yesterday’s release of better-than-expected inflation data from Germany and France raised hopes that the worst of the cost-of-living crisis in Europe is over. Looking forward, the November Eurozone PPI release is due later in the session and should provide more clues as to where inflation is headed in Europe. Ahead of this release, European equities are set to have a more negative tone after the minutes of the Fed’s December meeting showed that while policymakers supported a slower pace of interest rate hikes, they also want rates to be kept higher for longer.
The U.S. dollar edged higher this morning, gaining some support from the generally hawkish tone of the minutes of the Federal Reserve’s December meeting. The Dollar Index, which tracks the greenback against a basket of six other currencies, rose to 104.09. The minutes of the Fed's latest policy meeting indicated the agreement that the central bank should slow the pace of aggressive interest rate increases. However, policymakers were still keen to emphasize their focus on combating inflation: Fed members favour a restrictive policy stance for a sustained period, until inflation is on a clear downward path to 2%. Ultimately, the Fed story seems to remain a key driver of the dollar and global asset market trends in 2023.