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Market Report : 20.01.23

Published: 20/01/2023 By ECAP

Sterling continues to go from strength to strength, as markets come round to our long-held view that the downturn in the UK economy may not be as bad as previously feared. This morning’s UK retail sales print will be the main economic data releases today in an otherwise relatively quiet end to the week for currencies.

The euro has largely been stuck in a narrow range, with some hawkish comments from ECB President Lagarde failing to inspire a clear leg up in the common currency. Lagarde noted yesterday that the bank would ‘stay the course until such a time when we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner’. In our view, this is a clear signal that additional 50bp rate hikes are on the way during at least the next couple of Governing Council meetings. There has been speculation this week that the bank may revert back to a 25bp move in March, following a 50bp hike in February, but we have not seen clear enough evidence of a downtrend in Euro Area inflation thus far, particularly in the core index, in order to justify such a call.

The US dollar has continued to trade largely on the back foot against most currencies, as investors bet that the Federal Reserve will end its rate hike cycle following its March policy meeting. Wednesday’s soft US retail sales data further fuelled these expectations. Sales fell 1.1% month-on-month in December - a larger downturn than the -0.8% consensus, and the biggest contraction in a year. We note that there was also a downward revision to the November data, ensuring that sales experienced their largest three-month drop since December 2020 and the height of the first winter lockdowns of the COVID-19 pandemic.