Published: 28/02/2023 By ECAPSterling managed a relief rally yesterday after news broke that the Northern Ireland Brexit deal has been agreed between the UK and the EU. However, the currency was still headed for its first monthly drop since September. British consumers have become more optimistic about their personal finances and the outlook for the economy, but their mood is a long way below where it was prior to the COVID-19 pandemic. Nevertheless, a pick-up in consumer sentiment does not always translate into a pick-up in spending, as evidenced by a flat read of retail sales for February. The grind lower in the pound in February has, for once, had less to do with the weakness in the British economy and more to do with the view among investors that the Federal Reserve still has some way to go before it can stop raising interest rates.
The Euro held its ground yesterday as investors digested the new trade deal between the UK and the European Union ahead of the release of key regional inflation data. This news is unlikely to remove the downbeat mood among investors as markets become increasingly wary of a further rise in borrowing costs with inflation remaining elevated. Both France and Spain release consumer price data for February later in the session and are expected to show that inflation remains stubbornly high despite sharp increases in interest rates by the European Central Bank. Although, the headline rate is likely to have fallen in February, core inflation is likely to have remained stubborn.
The US Dollar has been building momentum this month as stronger-than-expected economic data, including hot inflation numbers, pointed to the US Federal Reserve raising interest rates further and keeping them high for longer than previously envisaged. However, the Dollar relinquished some recent gains yesterday as markets awaited a barrage of readings this week for more cues on economic growth and monetary policy. The positive shift witnessed in risk mood and mixed macroeconomic data releases from the US weighed on the US Dollar, snapping a four-day winning streak. Focus this week is on US PMI data, as well as consumer sentiment and labour market readings for January and the fourth quarter. Ultimately, any signs of resilience in the US economy give the Fed more economic headroom to keep hiking rates.