Market Report : 21.02.23

Published: 21/02/2023 By ECAP

The UK ran an unexpected budget surplus in January, reflecting strong income tax receipts that could give finance minister Jeremy Hunt, a little more leeway than he thought as he prepares his annual budget. However, the pound continues to struggle even after the unexpected budget surplus of £5.42 billion in January, a month in which millions of Britons pay their income tax receipts. Apart from this, expectations that the Bank of England's current rate-hiking cycle is nearing the end, further undermines the pound and contributes to capping any upside potential. Citi's economists still expect a 25-basis point interest rate hike to be delivered at the next Bank of England meeting, but they caution that the likelihood of a pause in May is increasing as the peak in UK inflation has passed.

The Euro is expected to open marginally lower this morning, ahead of the release of key economic activity data for the region which are set to provide further direction for the bloc’s single currency. The main focus during this session will be on the flash PMI data from the Eurozone and the UK. These numbers are likely to offer investors a guide to the prevailing direction of economic trends in the manufacturing and service sectors. Moreover, the numbers will be carefully studied, as they will show how well the Eurozone economy is performing after unexpectedly growing in the final quarter of 2022. However, there also remains a degree of caution within the markets as Russian President Vladimir Putin is due to make a speech later in the session as his invasion of Ukraine enters a second year.

The dollar edged higher this morning, retaining its recent strength as traders await more economic clues as to the resilience of the US economy and the likely policy response from the Federal Reserve. The Dollar Index traded 0.2% higher at 104.02, not far from the six-week high of 104.67 hit last Friday. Traders are likely to be out in force again after yesterday's bank holiday, and will be looking to the release of more economic data to support the recent move higher in the dollar. Today’s key release will be PMI data for February, which is expected to show a small improvement from the previous month, but most eyes will be on the minutes of the last Fed meeting, due tomorrow.