Market Report : 09.12.22

Published: 09/12/2022 By ECAP

Sterling seems to be struggling this morning as investors grow increasingly concerned about the health of UK businesses over the winter period. Amid the current cost-of-living crisis, consumers are cutting back on spending. This in turn is hammering British retail and hospitality businesses, with many firms worrying about whether they’ll survive the post-Christmas slump in activity. Adding to the anxiety, the wave of industrial action across the UK is intensifying. Rail strikes over Christmas are driving up cancellations at a crucial time for the British hospitality industry, which has been hit particularly hard over the past few years. Ultimately, these concerns seem to be putting GBP investors on the back foot this morning.

The Euro has found its recent gains limited as concerns about the Russia-Ukraine crisis keep the common currency muted. The Eurozone is particularly vulnerable to negative economic impacts from the Russia-Ukraine war. As a result, these worries are hindering the single currency’s progress. Furthermore, while the UK and US seem to be weighing up the chances of peak inflation, energy costs in the euro area are a going concern as unemployment remains at record lows and wage growth is accelerating. Ultimately, the core inflation rate is unlikely to peak until mid-2023 and will only fall slowly thereafter. Against this backdrop, the ECB's goal of pushing the inflation rate back to just under 2% on a sustainable basis seems a long way off. Looking forward, the economic slate is largely empty in Europe today, with Spanish industrial production expected to rise 2.8% on the year in October, a drop from the 3.6% growth the prior month.

The dollar retreated this morning as worries over a slowdown in the United States mounted, with traders on guard ahead of a slew of central bank meetings next week, with the Federal Reserve taking centre stage. Today’s focus turns to upcoming U.S. inflation data, which is expected to shed further light on the potential path of monetary policy. The U.S. producer price index due later today is expected to show that manufacturing inflation eased further in November. The reading is also likely to herald a similar trend in the consumer price index, which is due next week. However, markets are wary of any signs of inflation remaining sticky, which could invite more hawkish moves by the Federal Reserve. While the central bank is expected to hike rates by a relatively smaller 50-basis points next week, it has warned that rate hikes could continue for longer than expected in the face of stubborn inflation.