Published: 18/05/2023 By ECAPSterling opened this morning’s trading session relatively flat as money market pricing reveals investors have pared expectations for a 25-basis point hike in June to 73% following the labour market statistics released earlier this week. For now, sterling’s continuous outperformance in 2023 follows a run of expectation-beating economic data releases that defied a consensus amongst institutional forecasters for the economy to have already slid into a long-running recession. However, an end to the strong run could become increasingly likely heading into mid-year as the positive UK economic surprise story is now well understood and positioned for by investors. Ultimately, should economic data underwhelm going forward the Pound could find itself yielding further value to the likes of the Euro and Dollar.
The Euro was buoyed during yesterday's trading session as mixed signals from European Central Bank policymakers kept the Euro in a narrow range. However, a rise in Eurozone consumer inflation expectations inspired fresh ECB rate hike bets. Despite the slight decline in core inflation in April, prices are still not evolving as market participants believe the ECB would like them to. In turn, President Christine Lagarde has made it clear that efforts to curb stubbornly high inflation aren't over and said that there are factors that can induce significant upside risk to the inflation outlook. Ultimately, this reinforces the view that there are more interest rate increases still to come.
The US dollar rose in early European trade this morning as negotiations to end the debt ceiling stand-off in Washington have yet to result in a deal. The dollar index gained 0.1% to 102.85, and traded near a seven-week high. President Joe Biden and top US congressional Republican Kevin McCarthy have agreed to negotiate directly over the raising of the government's $31.4 trillion debt ceiling, after a months-long stand-off. This has raised optimism that a deal can be reached to avoid a damaging debt default, but a cautious air has tempered risk-taking. Looking forward, traders will also focus on a slew of Federal Reserve speakers this week, most notably Chair Jerome Powell on Friday, for more cues on monetary policy. Ultimately, the US central bank is widely expected to pause its rate-hiking cycle in June, but Fed officials have generally offered up a hawkish view on monetary policy this week, pointing to still elevated levels of inflation.