Market Report : 20.02.23

Published: 20/02/2023 By ECAP

Sterling underperformed last week, as recent economic data suggests that the Bank of England may become slightly less aggressive when deciding on the future path of UK interest rates. Growth in the UK has flatlined, the jobs market remains strong, retail sales remain poor but marginally better-than-forecast, while core inflation is falling. This has lead many investors to believe that the BoE may decide that UK interest rates are starting to work and that they should be wary of making interest rates too restrictive. For now, the UK bank rate, currently at 4%, is seen topping out at 4.5% with a potential rate cut at the December meeting now starting to be priced in. Nevertheless, sterling may get a marginal boost in the coming days if market talk of an impending Brexit deal proves correct. With UK PM Rishi Sunak said to be in talks with the EU over an imminent deal on the Northern Ireland protocol.

The Euro started today’s session relatively flat, with investors cautious at the start of a week that includes the release of important Eurozone activity data as well as the minutes from the last Federal Reserve meeting. Today's U.S. holiday is likely to limit trading volumes in Europe, but investors will also be wary of taking strong positions ahead of some important regional economic data. The highlight of the week will be tomorrow's flash PMI data for February, which will show how well the Eurozone economy is performing after unexpectedly growing in the final quarter of 2022. Germany’s Ifo Business Climate Index on Wednesday will show how the region’s largest economy is weathering the energy crisis, while the bloc is also to release final inflation figures for January on Thursday.

The dollar was on the front foot this morning, supported by a strong run of economic data out of the United States that traders bet will keep the Federal Reserve on its monetary policy tightening path for longer than initially expected. However, trading is likely to be thin today, with U.S. markets closed for Presidents' Day. Nevertheless, a slew of data out of the world's largest economy in recent weeks pointing to a still-tight labour market, sticky inflation, robust retail sales and higher producer prices, have raised expectations that the U.S. central bank has more to do in taming inflation, and that interest rates would have to go higher. Markets are now expecting the Fed funds rate to peak just under 5.3% by July. Moreover, hawkish comments from Fed officials have also underpinned the U.S. dollar, as they signalled interest rates would need to go higher in order to successfully quash inflation.