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Market Report : 12.01.23

Published: 12/01/2023 By ECAP

Sterling seems to have found some support as Corporate Earnings are painting a brighter picture than what was previously anticipated. Incoming results from major UK retailers suggest the UK economy might be doing better than economists had expected, raising the prospect for upside surprises in UK economic data and the Pound. Furthermore, the trading updates hint that the release of official data next week could come in better than expected and challenge a consensus amongst economists that the UK is set for an extended recession. Upside surprises in the data would, in turn, prove supportive of sterling which continues to underperform its major peers.

The euro briefly hit a seven-month high against the dollar yesterday but held within a narrow range as traders avoided making big moves ahead of today’s U.S. inflation data, which may offer a clearer picture of where interest rates are headed. There is little in the way of significant economic data scheduled in Europe today, and all eyes will be on the December U.S. consumer price index later in the session. Investors have been expecting the Federal Reserve to slow the pace of its interest rate hikes when it next meets in early February, but policymakers have been very keen to make clear that such a decision is data dependent.

The US dollar stabilised in early European trade this morning, ahead of a widely awaited US consumer inflation release. The greenback has been on the back foot since late last year as an easing in interest rate increases by the Federal Reserve, and the expectation of more easing to come, ended a rally that pushed the currency to a 20-year peak in September. Data showing inflation slipping back from 40-year highs has powered the expectation of the Fed reining in its aggressive rate hikes, and thus the focus is now squarely on the December US CPI release, due later in the session. This is expected to show that inflation eased further from the prior month, with the headline annual rate seen coming in at 6.5% in December, a drop from 7.1%. The core CPI figure, which excludes volatile energy and food prices, is seen showing annual growth of 5.7%, down from 6.0% in November. Ultimately, this year's FX market proposition remains whether US inflation can acquiesce enough to allow the Fed to cut later this year.