Market Report : 08.02.23

Published: 08/02/2023 By ECAP

Sterling failed to muster much strength yesterday as data released failed to inspire any confidence in the UK economy. Both house pricing data and retail sales failed to buoy the pound, as both highlighted the underlying issues plaguing the UK economy. Despite house prices falling flat for the first time in four months, the housing market is still primed to slump further. Elsewhere, lending some modest support to sterling is positive news out of the ongoing Northern Ireland protocol. The latest breakthrough saw both the EU and the UK are on the verge of an agreement with food and animal health checks. However, a potential trade war could be on the table if negotiations are not met, which could send sterling plummeting.

The Euro was slightly under pressure yesterday as industrial production in Europe’s largest economy widely missed forecasts and printed at -3.1%. Far exceeding market expectations of a 0.7% drop, it was the steepest decline in industrial output in 10 months. With another drop in production, recession fears returned, souring demand for the single currency. Looking forward, the Euro has been oscillating in an extremely narrow range against major peers this morning as investors are awaiting the release of the preliminary German inflation data for fresh impetus. The preliminary German Harmonized Index of Consumer Prices is expected to escalate to 10.0% from the former release of 9.6%.

The dollar edged lower in early European trade this morning, retreating after a relatively dovish speech from Fed chair Jerome Powell raised hopes the central bank may soon ease monetary policy. The foreign exchange market had expected Powell to push back against easing rate expectations, particularly after the surprising strength of Friday's U.S. jobs report. Instead, while Powell acknowledged that interest rates might need to move higher than expected if economic conditions remained strong, he also reiterated that he felt a process of disinflation was underway. That said, dollar losses are limited and the index remains not far off Tuesday's one-month high after the nonfarm payrolls had surged by 517,000 jobs on Friday, lifting expectations that the Fed would need to keep raising interest rates.