Published: 15/03/2023 By ECAPSterling declined in early European trade against the dollar, away from a four-week high on active profit-taking. Investors are shunning risks ahead of the release of the official government budget for 2023 today, which will dictate government spending, expected income and borrowing levels, and financial targets. UK finance minister Jeremy Hunt is expected to announce an improving financial outlook and 30 billion pounds of additional funds for government spending to boost economic growth. However, the UK has the highest level of economic inactivity among G7 countries, due largely to long-term absenteeism and a rise in early retirement during the pandemic.
The Euro has been trying to hold its ground and received a mild boost yesterday after Reuters reported that the European Central Bank is set to stick with its plans to raise its key rates by 50-basis points at tomorrow’s meeting. According to this morning’s report, the ECB believes markets are calming, that inflation remains stubbornly high, and that their credibility would be damaged if they didn’t deliver a half-point rise. Moreover, the ECB source report also revealed that the central bank believes that inflation will still be significantly above target (2%) in 2024 and slightly above in 2025. That point was underlined by the publication of French inflation data for February, which were revised up to show a rise of 1.1% in prices last month, taking the annual rate of inflation in the Eurozone's second-largest economy back up to 7.3%
The dollar was up in early trading this morning as markets adjusted their view of the likely path for US interest rates in the wake of yesterday’s inflation report for February. The Bureau of Labour Statistics said the consumer price index rose by 0.4% in February, a slowdown from 0.5% in January. Moreover, the annual rate of inflation fell to 6% from 6.4% and is now down by one-third from its peak of over 9% in June last year. Even so, it remains at three times the Federal Reserve's targeted rate of 2% and gives the central bank little leeway in its battle to tame inflation. Investors appeared to take the print as being mild enough to remove any desire for a 50-basis point rate hike at its policy meeting next week. The market settled once again into a consensus that the Fed will raise interest rates by 25-basis points at its meeting next week. Failing to do so would likely be interpreted as panicking and as such, unlikely to restore confidence in the US banking sector.