Published: 24/01/2023 By ECAPSterling fell across the board yesterday after renewed fears that the expected UK recession this year could be twice as bad as previously anticipated. Adding to these concerns, the UK’s National Grid prepared to activate contingency plans as a cold snap strained Britain’s energy system. Looking at today’s economic docket, analysts seem worried that the UK’s flash PMIs could hurt the pound. Economists expect them to reveal an ongoing contraction in the country’s private sector activity. Still, sterling should be able to count on a generalised alignment in market expectations around a 50-basis point hike by the Bank of England next week, which suggests a smaller scope for a correction.
The Euro held its ground and consolidated its recent gains as the common currency found support from European Central Bank officials' signalling additional jumbo interest rate rises in Europe. ECB President Christine Lagarde said that they would keep raising rates quickly to slow inflation which remains far too high, largely repeating the bank’s most recent policy guidance. Looking forward, the rest of the economic calendar for the day is likely to be dominated by S&P Global’s purchasing managers indices across Europe, where the focus will be on whether the Eurozone economy managed to avoid contraction at the start of the year. Ultimately, mild weather and tumbling gas prices have bolstered confidence that a recession - if it comes - will be brief and shallow, rather than the deep contraction that seemed likely a year ago when Russia invaded Ukraine.
The dollar hovered near a nine-month low to the euro and gave back recent gains against the pound, as traders weighed the risks of a U.S. recession and the path for Federal Reserve policy. Money market traders see only two more quarter point rate hikes by the Fed to a peak of around 5% by June, with two quarter point cuts following before year-end. However, the Fed itself has insisted that 75-basis points of more tightening is likely on the way. Nevertheless, at least in the current cycle, the market thinks the Fed's most hawkish days are behind it. Therefore, when investors weigh the outlook for central bank policy, it depicts the dollar at a disadvantage, given market bets on the Fed moving more slowly than its counterparts abroad.