Market Report : 09.03.23

Published: 09/03/2023 By ECAP

Sterling reacted negatively to the more aggressive guidance given by Fed Chair Jerome Powell during his two day testimony in front of the Senate Banking Committee. Although there was some positive UK economic data (housing and retail sales), the scale of the dollar’s move as well as the shift in market sentiment outweighed any potential sterling upside. Moreover, the pound seems to have been cast adrift by its own central bank which shows little inclination to raise interest rates much further than the current 4%. This is despite UK data picking up in February, raising the prospect of elevated inflation levels that would defy Bank of England forecasts for a rapid fall in UK inflation in 2023.
The Euro has been moving in mixed fashion this week following the spree of contracting German Retail Sales as households are facing higher price pressures. Individuals are struggling to offset the impact of inflation-adjusted prices of goods and services as the increment in the labour cost index is lower than the pace of the rising Consumer Price Index. Moreover, annual German Retail Sales has now contracted consecutively for the ninth time. However, despite contracting German Retail Sales, the European Central Bank cannot consider a slowdown in the policy-tightening pace as the current inflation is four times the desired level. This, in turn, has heavily supported the bloc’s single currency.

The US Dollar was perched near a three-month high this morning as Federal Reserve Chair Jerome Powell's message that interest rates would have to go higher and possibly faster to tame inflation dominated sentiment and underpinned the US currency. In yesterday’s second day of testimony to Congress, Powell reaffirmed his hawkish message, though striking a cautious note that debate on the scale and path of future rate hikes was still underway and would be data-dependent, causing the US dollar to pause its sharp rally from earlier in the week. Ultimately, investors and traders scrambled to reprice a more aggressive pace of interest rate hikes in the wake of Powell's comments, with Fed funds futures now implying a near 70% chance the Fed will raise rates by 50-basis points this month, up from just about 9% a month ago.