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Market Report : 18.01.23

Published: 18/01/2023 By ECAP

UK inflation stayed stuck at over 10% in December amid signs that consumers kept spending over the Christmas period despite an intensifying cost-of-living squeeze. The Office for National Statistics said the consumer price index rose 0.4% on the month, bringing the year-on-year inflation rate down to 10.5% from 10.7%, in line with economists' expectations. However, there were signs that the numbers were flattered by a drop in fuel prices, and that underlying inflation pressures remained strong. Investors are aware of the fact that, despite a slight softening of the economy, these are still hugely unsustainable numbers that will require hawkish financial policy from the Bank of England.

The mood has turned for the better in the Eurozone. The ZEW economic sentiment index for Germany, the region’s largest economy, swung back to 16.9 in January, its highest in 11 months, from -23.3 in December. The index, which is better at marking turning points in sentiment than at measuring actual activity, rebounded thanks to the sharp decline in energy prices over the last month, which has greatly improved the outlook for Germany’s energy-intensive factories. The euro was boosted after German Chancellor Olaf Scholz said at the World Economic Forum in Davos that he was convinced Europe's largest economy would not fall into a recession. Looking forward, the final release of the December Eurozone CPI is due later in the session and is expected to be confirmed at an annual 9.2% growth, a sharp drop from 10.1% the prior month.

The US Dollar caught aggressive bids and recovered from a seven-month low touched earlier this week. However, the strong intraday USD rally was fuelled by a major sell-off in the Japanese Yen that followed the Bank of Japan's decision to maintain its accommodative policy stance. Apart from this, concerns over a looming global recession further benefitted the greenback's relative safe-haven status against its European counterparts. Nonetheless, expectations for an easing monetary policy by the Fed contributed to capping the greenback, which quickly retraced most of its overnight gains. Markets are pricing in a greater chance of a 25-basis point Fed rate hike in February. This would lead to a fresh leg down in the US Treasury bond yields and forces the USD to pare any intraday gains. For now, the focus remains on the US economic docket, featuring the release of the Producer Price Index and monthly Retail Sales figures. This, along with the US bond yields and the broader market risk sentiment, might influence USD price dynamics and allow market participants to grab short-term opportunities.