Market Report : 17.01.23

Published: 17/01/2023 By ECAP

Sterling rose after the Office for National Statistics reported 27K jobs were created in the three months to November, which was unchanged on the previous month and ahead of consensus expectations for a slowdown to 5K. The unemployment rate remained unchanged at 3.7% while those signing up for out-of-work benefits rose by 19.7K, which was fewer than the 19.8K markets were expecting. At the same time, wage growth in November grew more than expected, rising 6.4% on the year, suggesting that the Bank of England will have to keep a tight monetary policy in its attempt to rein in inflation. In fact, for the Bank of England to consider exiting its policy of raising interest rates, wages and employment must come down as this would be symptomatic of a cooling economy. The figures are therefore likely consistent with another 50-basis point hike in February, followed by further increases.

Europe’s single currency continues to hold steady against its major peers, marking a new high for the last months against the USD during yesterday’s trading session. However, the euro is expected to trade in a mixed fashion today as investors digest dire Chinese growth numbers with concerns about global economic outlook high on the agenda. Nevertheless, the Euro continues to hog the limelight as the European Central Bank is aiming to achieve its interest rate peak by the Summer. A poll from Bloomberg indicates that ECB President Christine Lagarde is expected to push interest rates to 3.25%. Ultimately, the central bank is expected to announce a 50-basis points interest rate hike in February and March and a 25-basis point rate hike in May that will support the ECB in achieving a terminal rate from the current rate of 2%.

The dollar has seen some support this morning as it edged off its recent seven-month low. In fact, the Dollar Index rose 0.1% to 102.0, bouncing from the low of 101.77 seen last night. However, the conviction call within the market now appears to be that the greenback has peaked with the US Federal Reserve nearing the end of its rate-hike cycle as inflation heads lower. Morgan Stanley, for example, has cut its 2023 year-end forecast for the dollar index to 98 from 104, as have many other financial titans. Looking forward, the US data calendar is relatively light this week, but retail sales, industrial production and existing home sales should all fall on the soft side. In theory, then, this should not impact too much the market expectations of two 25-basis point hikes by the Federal Reserve in February and March, both of which are expected to be reversed by year-end. Ultimately, global growth is showing signs of buoyancy, macro and inflation uncertainty are waning and the USD is rapidly losing its carry advantage.