Published: 13/04/2023 By ECAP
UK gross domestic product was flat in February, as falls in services and production were offset by growth in construction and retail. The stagnation in GDP means the economy managed to avoid recession in Q1. However, it also increases the chances that the Bank of England will need to raise interest rates further to generate the economic weakness required to reduce inflation all the way to 2.0%. Although a recession has been avoided – for now at least – the UK economy remains in a troubling state. The UK’s poor performance over the last 12 months is, in part, attributed to the rapid hikes in interest rates needed to bring inflation under control, and the country’s heavy dependence on natural gas for heating and electricity.The Euro found modest strength this morning – despite a lack of data – as the negative correlation the Euro shares with the US Dollar has seen the former strengthen. Moreover, German inflation data, released earlier Wednesday, illustrated the extent of the difficulties the ECB faces, as consumer prices in the euro zone’s dominant economy rose 0.8% on the month in March, up 7.4% on an annual basis. Ultimately, the European Central Bank seems likely to continue hiking interest rates for longer than its U.S. counterpart in order to rein in rising prices – thus, supporting the Euro’s recent appreciation.
The US dollar traded near two-month lows this morning as softer than expected inflation data and fears of a recession saw markets pricing in a greater chance that the Federal Reserve will pause its rate hike cycle. The dollar index tumbled yesterday after data showed that US inflation eased more than expected in March, although core CPI inflation still remained stubbornly high. Nevertheless, the data triggered increased bets that the Fed will hike rates once more before announcing a pause in June, according to Fed Futures fund prices – a scenario that bodes well for rate-sensitive and risk-heavy assets.