Market Report : 11.01.23

Published: 11/01/2023 By ECAP

Newsflow in the UK has been similarly quiet, with the pound also taking its cue from events elsewhere. Bank of England ratesetter Pill spoke earlier in the week, warning of the risk that UK inflation could prove persistent, even if energy prices fall. But, this view already appears to be priced in by markets, and his comments were mostly overlooked by investors. There will be no UK data releases on Wednesday or Thursday, so attention will drift towards Friday’s monthly GDP release. A modest 0.2% contraction for November is expected, although we think that another upside surprise may be on the cards.

The euro, which has been well bid above the $1.07 level. There has been no major news out of Europe this week, though recent comments from European Central Bank officials have raised expectations that the ECB still has some way to go in its fight against inflation. This includes chief economist Lane, who last week said that any recession was currently mild and that rates in the Euro Area would need to go above 2%. Industrial production data will be released on Friday, though aside from that we are likely to see the common currency driven more by events elsewhere, notably tomorrow’s US inflation report.

The US dollar has spent the last couple of trading sessions nursing its losses. The greenback sold-off sharply at the end of last week following Friday’s labour report, which delivered another strong payrolls number, but relatively soft wage growth. Against its basket of major counterparts, US currency is currently hovering around its lowest level in seven months, as investors and strategists appear to be coming round to the view that the dollar may experience a reversal of fortunes in 2023. A big test for the greenback will be tomorrow’s US inflation data, with another easing in both the headline (6.5%) and core (5.7%) rates expected. If confirmed, that may lessen pressure on the Federal Reserve, whereas an upside surprise could bring another 50bp rate hike from the Fed in February into view, and conversely support the greenback.