Published: 13/03/2023 By ECAPSterling opened this morning's trading session in a mixed fashion after slightly ceding ground to an outperforming Euro and Dollar, despite a better than expected set of January GDP figures from the UK last Friday. With the economy more resilient than anticipated, the Chancellor is in a more favourable position for Wednesday's annual fiscal update. However, he is also constrained by lingering risks of inflation and pessimism about the long-term prospects of the economy. Nevertheless, whilst Wednesday's budget is the highlight of the week for Sterling, it is preceded by the release of employment and wage data for January. This is likely to be influential for next Thursday's Bank of England interest rate decision and the outlook thereafter.
The ECB looks set to hike interest rates by another 50-basis points at its meeting on Thursday after already raising rates by 3 percentage points since July in a bid to tame inflation. Data showing that underlying inflation in the Eurozone ticked higher last month added to concerns that price pressures are proving persistent. Moreover, markets have started to price in another 50-basis point hike at the ECB’s May 4th meeting. The minutes of the ECB's February meeting have done little to challenge those expectations. In the press conference that follows their decision, ECB President Christine Lagarde will likely be put on the spot on how high rates will go at Thursday’s post-policy meeting press conference.
The US dollar slipped lower this morning after Friday’s labour data for February showed slower wage growth. Moreover, traders and investors have been reassessing the likelihood of another rate hike by the Federal Reserve given the ongoing US banking crisis as well as SVB’s collapse. Looking forward, market participants will be anxiously waiting for tomorrow’s inflation data. A hotter-than-expected inflation reading could reignite fears among investors already on eggshells following the failure of SVB. Economists are expecting monthly inflation to rise by 0.4% February after a 0.5% increase the prior month for an annual gain of 6%. Fed Chair Jerome Powell said the US central bank is likely to raise rates higher than previously expected if upcoming data shows that the economy remains hot after almost a year of tightening but added that no decision has been made yet about the upcoming March meeting.