Market Report : 06.04.23

Published: 06/04/2023 By ECAP

Sterling dipped yesterday but remained close to its 10-month high against the dollar hit the day before, as improving economic circumstances have helped sterling to be one of the biggest beneficiaries of the softening U.S. currency. The pound rallied roughly 2%-3% against the dollar in the first quarter of the year, the most in the G10 and outpacing gains by other major European currencies. British economic data has largely come in slightly better than feared, the latest example being strong service sector activity data. That in turn has driven market expectations of more interest rate hikes from the Bank of England as it seeks to rein in inflation, underscored by remarks from policy makers. Ultimately, markets are currently pricing in another 40-basis points in rate hikes this cycle.

The Eurozone economy expanded in March at its fastest pace since May 2022, according to final estimates from S&P Global. Southern Europe in particular grew strongly, while France and Germany – both hobbled by extensive strike action in March – limped along. There was also some good news from the hard data, with German factory orders rising at the fastest pace in nearly two years in February and French industrial production also rising more than forecast. The bad news is that analysts don’t expect it to last, given the tightening of credit conditions across the region that started well before last month’s banking issues. Ultimately, the euro, which hit a two-month high on Tuesday, was unfazed.

The Dollar crept higher yesterday but stood near a two-month low as traders weighed how pivotal US jobs data coming out on a stock trading holiday would impact Federal Reserve policy, after a raft of data this week pointed to a cooling economy. The closely watched US non-farm payrolls report on Friday, when many markets globally are closed, will follow disappointing services sector data as well as a slump in US March manufacturing activity at the start of the week. While the slew of sluggish economic data has caused traders to scale back bets on how much longer US rates would need to stay in restrictive territory, it has simultaneously reignited recession fears. Ultimately, US rate futures markets are currently pricing in a roughly even chance of the Fed leaving rates unchanged at its next meeting, with rate cuts being priced in as early as July and through to the end of the year.