Market Report : 19.04.23

Published: 19/04/2023 By ECAP

Sterling rallied this morning following the release of UK CPI figures and now has western Europe's highest rate of consumer price inflation, after it fell by less than expected in March to 10.1% from February's 10.4%. Despite falling in March, the UK was the only country in the European region to post a double-digit number for last month. The data is likely to bolster bets that the Bank of England will raise interest rates next month after core inflation - which strips out volatile energy and food prices - failed to fall as expected in March and instead held at 6.2%. Ultimately, another 25-basis point rate hike appears highly likely in May, and the Bank of England must stand ready to take further action unless economic data shows more definitive signs of cooling.

The Euro continues its retreat from last week’s highs following the latest German ZEW economic sentiment report which showed optimism fading in April. In fact, the economic sentiment indicator fell to 4.1, missing expectations of 15.3 and well below last month’s reading of 13. Moreover, the shared currency's relative underperformance could further be attributed to the fact that the European Central Bank policymakers have left the door open to a downshift in the pace of interest rate hikes. For now, market participants look forward to the release of the final Eurozone CPI print, which might influence the Euro and provide some impetus to the bloc’s single currency.

The US dollar stabilized in early European trade this morning, with traders trying to work out the likely path of the Federal Reserve’s monetary policy by digesting economic data and comments from policy makers. Federal Reserve Bank of St. Louis President James Bullard said, in an interview with Reuters on Tuesday, that he favoured continued interest-rate hikes to counter persistent inflation, potentially lifting the Fed Funds rate all the way to a range of 5.5% to 5.75%. However, his colleague Atlanta Federal Reserve President Raphael Bostic suggested one more interest rate rise of 25-basis points to the 5.00%-5.25% target range should be enough for the Fed to then pause and gauge the extent to which inflation is returning back to target. Ultimately, US two-year Treasury yields reached an almost one-month high of 4.23% overnight, and remained around 4.21% in early European trading, suggesting that Bullard’s comments reverberated more around the markets.