Market Report : 16.02.23

Published: 16/02/2023 By ECAP

Sterling continues the week on the back foot and struggles to find any support as it consolidates its recent losses. This follows yesterday’s data release showing the annual headline rate of U.K. inflation slowed more than expected in January, easing the pressure on the Bank of England to continue its rate-hiking cycle. This release backs up the comments from the BoE, earlier this month that it saw signs that the surge in consumer prices had turned a corner. Therefore, as the BoE had already shown itself to be more cautious about further interest rate hikes, the weaker inflation figures would be just what the BoE needs to signal an early pause in interest rate hikes.
The Euro was boosted yesterday as European Central Bank President Christine Lagarde reiterated that they will be raising rates by 50-basis points at their next meeting. This is despite inflation decelerating over the last few months. However, the latest headline CPI rate of 8.5% remains well above their target of 2%. Looking forward, there will be several ECB speakers today. On that note, today’s comments by ECB Chief Economist Philip Lane will prove key to sustaining the euro’s near-term support. Speaking on “The Euro Area Hiking Cycle: An Interim Assessment” later this afternoon, analysts expect Lane to reinforce the market’s current terminal rate projection of 3.5% for the ECB, even if it is only tentative.

The Dollar edged lower in early European trade this morning, handing back some of the previous session’s gains after better-than-expected US retail sales pointed to more interest rate hikes by the Federal Reserve. The dollar Index traded 0.2% lower at 103.675, after hitting a near six-week high of 104.11 in the previous session. U.S. retail sales rebounded sharply in January after two straight monthly declines, rising 3.0% on the month compared with December’s 1.1% fall. This, adding to the stronger than expected U.S. consumer inflation earlier in the week, was seen as largely cementing the case that the Fed still has further to go in tightening rates. However, the data also illustrated the resilience of the world's largest economy. Looking forward, there is a plethora of U.S. economic data due to release today, including January PPI, housing starts and jobless claims.