Market Report : 03.04.23

Published: 03/04/2023 By ECAP

Sterling found support on Friday after UK GDP data exceeded forecasts. The British economy expanded 0.1% in the fourth quarter of 2022, beating previous estimates that the economy had stalled. Moreover, the British public's expectations for inflation, a crucial indicator for the Bank of England as it weighs another interest rate hike, cooled in March. Public expectations for inflation in 12 months' time eased to 5.4%, down from 5.6% in February, while expectations for the longer term slipped to 3.7% from 3.8%. However, despite this upbeat data, sterling saw some downward pressure as investors repositioned end-of-quarter trades, injecting volatility into the currency market. Sterling opened this morning’s trading session in a mixed range, as interest rate hike bets varied and high food inflation highlighted the ongoing cost-of-living crisis, with a lack of significant data from the UK leaves the pound poised to follow market sentiment and Dollar price dynamics.

The Euro continues to search for a clear direction as activity at struggling factories across the euro zone fell further last month and consumers feeling the pinch from rising living costs cut back. Euro zone manufacturing remains in troubled waters, with factories reporting a fall in demand for goods for an eleventh straight month amid the surging cost of living, tighter monetary policy, a shift to inventory destocking and subdued customer confidence. Looking forward, price action around the single currency should continue to closely follow Dollar dynamics, as well as the incipient Fed-ECB divergence when it comes to the banks’ intentions regarding potential next moves in interest rates. Although hawkish ECB-speak continues to favour further rate hikes, many analysts are starting to believe that this view appears in contrast to some loss of momentum in economic fundamentals in the region – which could further weigh on the bloc’s single currency.

The US Dollar has been mustering some strength in early European trade this morning as surging oil prices raised inflation concerns, which could prompt the US Federal Reserve to lift interest rates at its next meeting. The Dollar Index traded 0.4% higher at 102.56, after earlier breaking past 103 for the first time in a week. The index had dropped 1.8% in March, pressured by concerns that turmoil in the banking sector would hit economic activity, prompting the Fed to pause its monetary tightening cycle earlier than previously expected. This view was given a degree of credence after data on Friday showed US consumer spending rose only moderately in February after surging the prior month, with inflation showing some signs of cooling.