CAPITALDIGEST MARKET REVIEW, 20/1/2023
STERLING SLIDES TO SIX-WEEK LOW AS DOLLAR RALLIES
Sterling dropped to a six-week low against a stronger dollar on Friday, even though January retail sales data showed British shoppers were out in force last month. The pound eased 0.1% against the euro to 89.03 pence EURGBP=D3, and was 0.4% lower against the dollar at $1.19360 GBP=D3 having earlier fallen as far as $1.19150, its weakest since January 6. A stronger dollar was the main factor behind the drop on Friday, as the U.S. currency soared to a six-week high. “There is definitely a strong USD theme being seen at the moment, stemming from yesterday’s stronger PPI numbers which have seen the market now expecting the Fed to maintain its tightening bias for longer,” said Stuart Cole, head macro economist at Equiti Capital. Data on Friday showed British consumers unexpectedly increased their shopping in January, as sales volumes rose by 0.5% from December for only the second month-on-month increase since August 2021. Economists polled by Reuters had expected a 0.3% fall. “From the prospects of the economy it is good news, as it suggests there is a headwind pushing against the risk of recession,” said Cole. “But for the BoE it may be less welcome news, as buoyant demand makes their task in bringing CPI back to target that much more difficult.” The market is currently pricing in an almost 75% chance of a 25 bp rate hike from the Bank of England at its March meeting. IRPR. The pound recorded its biggest daily drop against the single currency in two months on Wednesday when data showed UK consumer price inflation (CPI) cooled to 10.1% last month, the lowest reading since September. Close attention is being paid to developments around British Prime Minister Rishi Sunak’s visit to Northern Ireland as momentum builds towards a deal to revise the Northern Ireland protocol, the trade rules agreed to avoid a hard border with EU member Ireland when Britain left the bloc.Away from Westminster, UK lender Natwest NWG.L reported a leap in profit in 2022 on Friday that should have sent its shares soaring. But its results contained a stark warning about the rising interest-rate environment.
DOLLAR CLIMBS ON HIGHER RATE EXPECTATIONS, AUSSIE SLIDES ON JOBS SHOCK
The dollar advanced on Thursday after strong U.S. retail sales data underpinned the resilience of the world’s largest economy, cementing the case that the Federal Reserve still has further to go in tightening rates. Elsewhere, the Australian dollar slid after data on Thursday showed that employment surprised in January by falling for a second straight month, while the jobless rate jumped to its highest since last May. The Aussie, which was marginally higher on the day prior to the data release, fell more than 0.5% to an intra-day low of $0.6868 in the aftermath, and last bought $0.6872. “The readings for January have really undershot market expectations,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Overall, some weakness indicated by the report … probably caused markets to pare back some of the interest rate rises pencilled in for the RBA rate hikes.” Meanwhile, U.S. retail sales rebounded sharply in January after two straight monthly declines, driven by purchases of motor vehicles and other goods, the U.S. Commerce Department said on Wednesday. The greenback surged on the back of the data release and clung to most of those gains on Thursday, with the U.S. dollar index last 0.07% higher at 103.87, after hitting a near six-week top of 104.11 in the previous session. The euro was little changed at $1.0687, while the kiwi slid 0.28% to $0.6263. “The U.S. economy continues to operate well. There’s very strong labour market data coming through, and the consumers are well supported,” said Jarrod Kerr, chief economist at Kiwibank. “We do think the Fed’s got a little bit more work to do.” The retail sales data came just a day after U.S. figures showed inflation slowing but still sticky. Markets are now expecting U.S. rates to peak above 5.2% by July. In other currencies, sterling fell 0.19% to $1.2015, after sliding more than 1% in the previous session.
STERLING SLIPS AS FALLING INFLATION EASES PRESSURE ON BANK OF ENGLAND
Sterling slumped against major peers on Wednesday, breaking a seven-day rally against the euro, after a bigger-than-expected drop in UK inflation in January raised expectations the Bank of England may end its interest rate hiking cycle soon. Data showed British consumer price inflation fell to 10.1% last month, more than the 10.3% expected and down from December’s 10.5%.Declines in underlying measures of price growth that are being closely watched by the central bank also dropped, lending weight to signals from the BoE that inflation could have peaked. The pound fell 0.8% to $1.2083 against a broadly stronger dollar, retreating from near two-week lows and on course for its sharpest one-day decline this month. It had fallen as much as 0.9% to $1.20715 during the session. The euro-sterling pair jumped 0.6% to 88.7 pence after losing more the 1% over the last seven sessions. “While the risk of a sharp recession may have lessened, the easing in price pressures may persuade the Bank of England to take a slightly less hawkish approach at upcoming MPC meetings,” Matthew Ryan, head of market strategy at payments and FX company Ebury, said. “Swap markets now see just two more 25bp rate hikes from the BoE, with a 50/50 chance of a first rate cut by year end. This is less aggressive than expected from both the U.S. Federal Reserve and the European Central Bank, which could present some near-term downside for the pound against its major peers,” he said. The BoE delivered its 10th straight interest rate hike earlier this month, raising rates by 50 basis points to 4.0%, and signaled that peak rates may be in sight – a relief for the economy that recorded zero growth in the last quarter of 2022. BoE rate-setters have since provided mixed signals, with some, including Jonathan Haskel and Catherine Mann urging tighter policy.
DOLLAR HITS SIX-WEEK HIGH VS YEN; RISES FROM TWO-WEEK LOW AFTER U.S. INFLATION DATA
The dollar hit a six-week high against the yen and recovered from a roughly two-week low against a basket of major currencies on Tuesday as data for January showing the smallest annual increase in U.S. consumer prices since October 2021 did not alter market expectations that interest rates will remain elevated for some time. The greenback initially fell across the board following the inflation report, but regained its footing as U.S. Treasury yields rose as well. The Labor Department’s Consumer Price Index increased 0.5per cent last month after gaining 0.1per cent in December, data showed. Monthly inflation was boosted in part by rising gasoline prices, which increased 3.6per cent in January. But in the 12 months through January, the CPI grew 6.4per cent, the smallest gain in about 1-1/2 years, and followed a 6.5per cent rise in December. January’s annual CPI rate though was higher than market forecasts for a 6.2per cent gain. “Month-over-month as expected, but upward revisions for last month brought year-over-year numbers above expectations. This should keep the U.S. dollar strong,” said Athanasios Vamvakidis, global head of G10 FX strategy, at Bank of America in London.”Inflation in the U.S. is clearly sticky. This will keep the Fed policies on track, keeping the U.S. dollar strong – not necessarily stronger. The big picture is that the inflation data clearly show that the market is too optimistic about inflation dropping enough this year to allow the Fed to start cutting rates.” In late afternoon trading, the dollar rose 0.5per cent against the yen to 133.035 yen, after earlier hitting a six-week peak of 133.305 yen. The dollar index, which measures the greenback against a basket of major currencies, was last flat at 103.22. It dropped as low as 102.50, its weakest level since Feb. 3 The euro gained 0.1per cent to US$1.0738, hitting a roughly two-week high of US$1.0805 after the data. The dollar also rose 0.2per cent versus the Swiss franc to 0.9215 francs. “The market is leaning toward short dollars for the first part of the year,” said Erik Nelson, macro strategist at Wells Fargo in London. “With a CPI number like this and recent activity numbers, it would be hard for the dollar to continue to sell off. I think it will remain relatively strong in the near term.”
STERLING EDGES LOWER AHEAD OF KEY DATA
Sterling edged lower on Monday at the start of a data-heavy week in which investors will scan inflation prints from the UK and the U.S. to make bets on the pace of further interest rate hikes. UK inflation likely eased further in January to 10.2% from 10.5% in December, having seemingly peaked at 11.1% in October. The data is due on Wednesday. This is seen strengthening the case for the Bank of England to slow its pace of interest rates raises after it dropped its reference to “act forcefully” against inflation earlier in February, which markets took to signal that the central bank may be nearing the end of its rate-hiking cycle. The pound was down 0.2% at $1.2035 against the dollar, while against the euro it was largely stable at 88.70 pence after the single currency marked its sharpest weekly decline since October against sterling. “We think markets will be given reasons to consolidate their view around a 25bp hike (from BoE) in March, but expectations of further tightening may ultimately prove unfunded,” said Francesco Pesole, FX strategist at ING. BoE rate-setters including Catherine Mann and Jonathan Haskel have come out in favour of more interest rate hikes since the meeting, while Chief Economist Huw Pill said it was important not to raise borrowing costs too high. “The EUR/GBP drop could extend to 0.8800 but we think markets are running out of reasons to stay bearish on the pair for longer,” Pesole said. Other data this week is expected to show that unemployment in Britain remained unchanged in December and weekly earnings rose less than they did in November. A survey on Monday showed British employers expect to raise wages for their staff by the most in at least 11 years but the 5% pay deals for workers would still fall well below expected inflation. British retail sales data for the month of January is expected to show that while consumers continued to spend less, the pace of decline in sales may have reduced in the new year. Sentiment more broadly was seen influenced by U.S. inflation due on Tuesday that is seen showing that core inflation rose on a month-on-month basis in January, while headline likely trended lower.