Market Report : 07.12.22

Published: 07/12/2022 By ECAP

Sterling could underperform in the coming weeks as financial markets seem to be settling back into macroeconomic-led trading with fears of a 2023 global recession dampening risk sentiment. The pound is highly correlated with global risk sentiment and has appreciated in value through October, November, and December in tandem with a bounce in stock markets. However, the main question is whether the rally can continue into the new year, one that is expected to see the world's major economies fall into recession? Economic strategists and analysts have been riding the bounce in what they describe as a tactical play as the longer-term bear market remains intact. The pound has recovered from record lows against the Dollar and multi-month lows against the Euro over recent weeks in a move that coincides with a pickup in global equity markets, therefore how it trades into year-end will likely be dependent on what happens to this equity space.

The Euro found some support this morning after losing ground for the past two sessions, helped to a degree by German industrial production falling 0.1% in October, less than the expected 0.6% decrease. Moreover, the European Central Bank meets next week and is widely expected to increase interest rates again to try and contain inflation, having raised rates by a combined 200 basis points since July. That said, ECB policymaker Constantinos Herodotou stated that the bank’s interest rates are now "very near" their neutral level. Ultimately, financial markets seem to have gotten ahead of themselves at the end of November, and recent economic data has led many investors to re-evaluate what the ECB, as well as its major counterparts – Bank of England and Federal Reserve – are going to do next week.

The U.S. dollar climbed in early European trade this morning, extending its weekly gains as skittish investors fret over the Fed’s rate hikes. Furthermore, increased recessionary concerns hit risk sentiment, boosting this safe haven. In fact, future economic growth prospects were in focus yesterday following comments from financial titans pointing toward uncertain times ahead. Bank of America predicted three quarters of mild negative growth next year, while JP Morgan Chase said inflation will erode consumer spending power and that a mild to more pronounced recession was likely ahead. Their comments came on the heels of recent views from BlackRock and others that believe the U.S. Federal Reserve's aggressive monetary tightening to combat stubbornly high price rises could induce an economic downturn in 2023. Ultimately, fears about economic growth come amid a re-evaluation by market participants of what path future interest rate hikes will take, following strong data on jobs and the services sector in recent days.