Published: 10/02/2023 By ECAPSterling ends the week on the back foot as Britain's economy showed zero growth in the final three months of 2022 – enough for it to avoid entering a recession for now – but faces tough prospects in 2023 as households continue to wrestle with double-digit inflation. Monthly gross domestic product data for December – a month marked by widespread rail strikes and bad weather – showed a 0.5% contraction, the Office for National Statistics said, larger than the 0.3% forecast. The data is in line with the Bank of England’s forecast last week: Britain would enter a shallow but lengthy recession, starting in the first quarter of this year and lasting five quarters.
Euro bulls might have to curb their enthusiasm after the rush to buy the single currency may have left it vulnerable in the short term, particularly given the uncertainty about many global central banks' interest rate plans. The euro hit its highest in 10 months against the dollar earlier in February, having gained 13% from late September's 20-year low. Moreover, the euro's gains have not just been at the expense of the dollar. Against the pound, it rose to its highest in over five months last week. Ultimately, the prospect of a milder recession thanks to falling energy prices and plentiful supplies of natural gas, coupled with China finally emerging from three years of harsh COVID restrictions, have ignited investor appetite for European assets generally.
The dollar edged higher in early European trade this morning, on course to post another positive week, amid caution ahead of next week's crucial inflation data release. The Dollar Index traded 0.1% higher at 103.207, and is set to post its second straight positive week, a run it has not had since October. The index has traded in a relatively tight range this week as traders digest economic data and try to parse speeches from a series of Fed policymakers for clues of the likely future pace of the Federal Reserve's rate hikes. Fed Chair Jerome Powell took a fairly dovish stance in a speech earlier this week, reiterating his belief that disinflation was underway, but his Fed colleagues have tended to express their desire for further rate hikes as the week has progressed.