Market Report : 06.01.23

Published: 06/01/2023 By ECAP

Sterling fell to a six-week low yesterday, with traders deserting the pound on the belief that a weakening U.K. economy will prevent the Bank of England from being as hawkish as its counterparts in the rest of the world. Following nine consecutive rate rises by the Bank of England, and more to come, British mortgage approvals sunk to their lowest level in November since the coronavirus-induced market slump of June 2020. Nevertheless, as price pressures and higher borrowing costs bite, Prime Minister Rishi Sunak has pledged to halve inflation, grow the economy, reduce public debt, and cut health service waiting lists. However, major financial institutions see high inflation persisting this year, no rate cuts until 2024 and fiscal policies becoming more austere.

The Euro continues to consolidate its recent gains as investors await the release of key Eurozone inflation data ahead of the widely-watched U.S. monthly jobs report. The Euro received a boost earlier this week from a bigger-than-expected drop in the speed of German consumer price rises, raising hopes that the European Central Bank could rein in its aggressive interest rate hikes reasonably quickly. This brings the release of Eurozone inflation data later in the session firmly into focus. The December CPI figure is expected to come in at 9.7% on an annual basis, only a small reduction from the 10.1% growth the prior month, but there is a degree of confidence within the markets that there could be a positive surprise with a bigger drop.

The U.S. dollar rose in early European trade this morning, trading near a one-month high after yesterday’s healthy employment data pointed to a strong labour market ahead of the widely-watched official jobs report. The Dollar Index rose 0.2% to 105.07, not far off yesterdays near one-month peak of 105.27. The index was on track for a weekly gain of more than 1.6%, its largest since September. Data released yesterday showed the number of Americans filing new claims for jobless benefits dropped to a three-month low last week, while the ADP report revealed that private employment increased by 235,000 jobs last month, far exceeding expectations. This sets up the official jobs report, due later in the session, which is expected to show that the labour market remained healthy in December, with 200,000 new jobs added and the unemployment rate unchanged at 3.7%. Ultimately, signs of strength in the U.S. labour market are understandably being read as prolonging both the Fed's concern with tight labour markets and its preoccupation with suppressing inflation.