Published: 09/02/2023 By ECAPSterling was seen stabilising against the Euro and Dollar midweek as a recent sell-off reaches extended levels and investors are confronted with a more optimistic outlook for the UK economy in 2023. The National Institute of Economic and Social Research (NIESR) released its latest forecasts for the UK economy yesterday, that finds the UK will likely avoid a protracted recession in 2023. The independent think-tank says GDP growth is set to remain close to zero, which would be an improvement on recent IMF and Bank of England forecasts for a more discernible contraction. Ultimately, the findings of the NIESR suggest that the Bank of England will have to contend with above-expected inflation readings over the coming months, which implies higher rates, for longer. Such upside data surprises could therefore be consistent with a stronger Pound as it would boost UK bond yields relative to those of the Eurozone and U.S.
The Euro found some support yesterday after German inflation remained elevated, thus increasing the likelihood of further interest rate hikes by the European Central Bank. Germany's harmonized CPI fell to 9.2% from 9.6% in January, slowing to the lowest level in five months, thanks to further government aid to ease the pain from soaring energy costs. However, core inflation remains stubbornly high, which could prompt the Eurozone's central bank to continue hiking interest rates into May. Investors, both in Europe and the U.S., have been searching for signs that inflation is peaking, so central bankers can start reining in their aggressive interest rate hikes.
The dollar slipped lower in early European trade this morning, with traders digesting a series of comments from Federal Reserve policymakers ahead of next week's crucial inflation data release. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded at 103.14, retreating from the one-month high of 103.96 it reached on Tuesday. The index slipped back a little earlier in the week after Fed chair Jerome Powell reaffirmed that a process of disinflation was underway, declining to push back strongly against easing rate expectations after the surprisingly strong U.S. jobs report. That said, a number of his colleagues were keen to point out yesterday that more interest rate hikes were needed to fully gain control of inflation. This puts next week’s U.S. CPI release for January firmly in the spotlight, as traders look for additional clues on the policy outlook.