Market Report : 12.04.23

Published: 12/04/2023 By ECAP

Sterling has been struggling to find a clear direction this week and could experience a setback as the Bank of England seems poised to surprise investors by keeping interest rates on hold in early May. However, money markets show investors are currently prepared for a further 25-50 basis points of interest rates from the Bank of England during the summer, which is at odds with ING's out-of-consensus expectation that the hiking cycle is now complete. Moreover, the pound's surprising rise comes as the bearish sentiment that clouded it at the start of the year is challenged by better-than-expected UK economic data which has prompted investors to bet on the likelihood of further Bank of England rate hikes.

The Euro posted small gains on Tuesday as investors and traders returned from the long Easter weekend. However, data released yesterday showed Eurozone Retail Sales dropped 0.8% in March as expected, and the annual rate worsened to -3% from -1.8%, but it was better than the consensus of -3.5%. Furthermore, sentiment remains guarded as market participants await the release of the U.S. CPI index for March to gauge just how sticky prices are likely to be and thus the likely response from the Federal Reserve. Looking forward, the next relevant report of the region will be tomorrow’s Industrial Production data. Ultimately, tightening expectations from the ECB point to a 25-basis points rate hike at the May 4th meeting.

The US dollar edged lower in early European trade, as market participants cautiously await the release of the latest US inflation data which could influence future Federal Reserve monetary policy. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.70. The main focus today will be the March US CPI, as traders try to work out the US central bank's next move. The general perception is that the Fed has one more increase of 25-basis points left in its rate-hiking cycle in May, before starting to cut interest rates later in the year. Also of interest will be the release of the minutes from the last Fed meeting, which could reveal the thinking of the policymakers as they hiked rates by 25-basis points last month in the midst of a banking crisis.