Market Report : 22.02.23

Published: 22/02/2023 By ECAP

Sterling retraced some of its losses against the dollar and notched its biggest gains against the euro yesterday, whilst British government bond prices fell on the back of UK PMI. Britain looks on course to sidestep a long recession after a survey showed a surprise return to growth by businesses this month, raising the likelihood of another Bank of England interest rate hike in March. The strength of the survey made it more likely that the BoE would raise interest rates to 4.25% in March, despite further signs of easing price pressures in the PMI. Nevertheless, the report poses a clear challenge to the BoE's central view that a long recession and rise in unemployment will bring inflation down such that further rate increases are not required.

The Euro retraced part of yesterday’s lost ground as investors digest key German inflation data ahead of the release of the minutes from the U.S. Federal Reserve. Data released earlier this morning showed that inflation remained at a high level in Germany, the euro zone’s most important economy. German consumer prices, harmonized to compare with other European Union countries, rose by 9.2% on the year in January, with prices increasing 0.5% on the month. Moreover, Italian inflation figures are also expected later in the session, and the country’s consumer price index is expected to remain in double figures on an annual basis.

The dollar bounced back yesterday after data showed that US business activity unexpectedly rebounded in February to reach its highest level in eight months, adding to recent numbers showing that US retail sales remained robust, a tight labour market, while inflation stayed elevated. However, the dollar edged lower in early European trade this morning, handing back some of the previous session’s gains as traders cautiously await the release of the minutes of the Federal Reserve’s February meeting. Markets have raised their expectations of how high the Federal Reserve would need to lift rates to tame inflation and will now focus on the minutes from the Fed's latest meeting, due for release later this session, for more clues of the policymakers' thinking.