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Market Report : 10.01.23

Published: 10/01/2023 By ECAP

Sterling rallied over three cents against the US dollar since last Friday, with sterling in the passenger seat whilst the greenback drives the move. However, sterling is trying to claw back further ground alongside the economic backdrop which remains neutral to negative as the UK government struggles to control a raft of strikes currently hitting the country. Nevertheless, there was some positive economic news in the UK overnight, as retail sales rose 6.5% last month compared with a year earlier. Thus, providing further support, however, the UK now needs to solve the current wave of industrial action otherwise the current small bid in sterling could quickly evaporate. Ultimately, with little in the way of UK economic news until the end of the week, it looks likely that the US dollar will continue to be in charge of cable.

The Euro rallied to a fresh multi-week peak against the US dollar on the back of the persevering sell-off in the greenback. This comes with investors’ re-assessment of the potential next steps by the Federal Reserve when it comes to future interest rate hikes. The change of perspective from market participants has been reignited soon after the publication of the December’s Non-Farm Payrolls last Friday. Indeed, whilst the mixed tone from the monthly US labour market still showed a healthy job creation, the wage growth seems to have lost some momentum and that is what is leading traders to start pricing in a probable pause in the Fed’s hiking cycle. Elsewhere, the Euro was helped by French industrial production climbing 2.0% on the month in November. This was better than the 0.8% growth expected, and a healthy improvement from the revised drop of 2.5% the prior month. Ultimately, the recent wave of better than expected macro-economic data continues to raise hopes that the slowdown in the Eurozone in 2023 may be milder than first feared.

The US dollar languished near a seven-month low against other major currencies this morning, as investors took heart that the Federal Reserve may be nearing the end of its rate-hike cycle and as China's reopening drove demand for riskier assets. Markets have grown increasingly doubtful that the Fed will have to take interest rates above 5% to cool inflation, as effects of its aggressive rate increases last year have already been felt. Investors now expect rates to peak just under 5% by June. Moreover, last week's employment report showed that while the U.S. economy added jobs at a solid clip in December, it also recorded a slowdown in wage growth. Looking forward, investors will turn their attention to a speech by Fed Chair Jerome Powell later today and to U.S. inflation data on Thursday, which could give further clarity on the outlook of the Fed's rate-hike path.