- Dollar surges higher, gaining almost 1% against both the euro and pound in early 2023. Moves are exacerbated by thin liquidity, however, highlighting that the dollar slump seen towards the end of 2022 may not be a one-way move.
- Outlook improves for the German economy as public support from government could cool euro-area inflation.
Data and Events this Week
Tuesday – US Manufacturing Purchasing managers' Index (PMI), UK Manufacturing PMI
Wednesday – Federal Open Market Committee (FOMC) minutes, MBA Mortgage Approvals, ISM Manufacturing, UK Mortgage Approvals, Eurozone Services/Composite PMIs
Thursday – ADP Employment Change, US Trade Balance, Initial Jobless Claims, UK Services/Composite PMIs
Friday – Nonfarm Payrolls, Eurozone CPI
Last Week's Range
EUR/USD 1.06-1.07 GBP/USD 1.2-1.21 USD/CAD 1.35-1.36 AUD/USD 0.67-0.68 USD/JPY 130.8-134.5 USD/CNH 6.91-7 USD/ILS 3.49-3.54 USD/MXN 19.3-19.6 USD/CHF 0.92-0.93 USD/INR 82.7-82.9 USD/BRL 5.19-5.3 USD/SGD 1.34-1.35 USD/DKK 6.94-7.01 USD/SEK 10.4-10.5 USD/NOK 9.8-9.9
Market Bias : Hawkish
- The dollar has started 2023 on the front foot following a calmer period through the latter half of December. The greenback is up over 1% today, with significant movement against the pound and euro. The move has occurred amid thinner liquidity as the markets slowly return following the break for holidays.
- As the defining economic theme of 2022, all eyes turn to the first Federal Reserve meeting of 2023 on 1 February. With the rapid rate hikes of 2022 in the rear-view mirror, market expectations are that the Fed will downshift again, hiking by 0.25% in both February and March, before pausing for the year. A more hawkish message from the Fed (higher for longer) would potentially drive the dollar higher.
- Wednesday, 4 Jan sees the release of the FOMC minutes. These minutes will likely show that the Fed was concerned about the robust labor market that made 17 of 19 FOMC members forecast a terminal rate above 5%.
Market Bias : Mixed
- The UK economy continues to be plagued by industrial action adding pressure to the pound, as troubles mount on Prime Minister Rishi Sunak. Much of this week will see rail workers paralyze the UK’s transport networks. Strike action will likely weigh on UK activity, adding downside risk to the pound.
- Bank of England forecasts indicate the economy is already in recession and unlikely to grow until early 2024. Despite this, the labor market is likely to heavily dictate the pace of tightening for the UK’s Monetary Policy Committee. Since 3Q 2022, job vacancies have dropped from historic highs supporting the idea that the unemployment rate bottomed out in the third quarter.
- A fourth monthly decline in the UK house price index shows that the housing correction rumbled on through December. Annual price gains have continued to decelerate sharply to 2.8% from 4.4% in November. Lower energy and housing prices are likely to provide some inflation relief potentially providing the Bank of England room to raise rates thereby supporting the pound.
Market Bias : Mixed
- This Friday’s release of Euro-area headline inflation may show a further cooling in December following a large package of government support delivered by the German government. Economists now see a decline to 9.5% in December from 10.1% in November. Core inflation is expected to remain at its record high of 5% highlighting the stickiness of 2022’s price increases.
- German unemployment unexpectedly fell today, echoing recent positive news emanating from the German economy. The mood has brightened in recent weeks as inflation shows signs of peaking, and it appears that disruptive shortages of natural gas will likely be avoided.
- The European Central Bank (ECB) is likely to continue to raise rates aggressively. Economists generally see the ECB as lagging the Fed and other central banks in raising rates to combat high inflation. However, much of the rate hikes are already reflected in the value of the euro.
Market Bias : Mixed
- Canada will likely see unemployment drift higher in 2023 as the economy teeters on the brink of recession. Growth in 2023 is expected to remain positive at 0.8%, supported by a services sector recovery and healthy consumer spending.
- The road to recovery is a risky one, with households even more vulnerable to higher-interest rates. The average Canadian household is more leveraged than it was prior to the pandemic. Canadian debt to disposable income is over 180%, compared to the US at just over 100%.
Market Bias : Bearish
- The Chinese economy ended the year in a major slump as business and consumer spending plunged in December. Official data showed a decline in manufacturing, while services activity collapsed to levels not seen since February 2020. Beijing’s decision to abruptly scrap strict COVID controls has fueled a surge in infections across major cities. However, the outlook for China may be shifting, as the swift policy shift may unshackle the Chinese economy and spur growth through 2023.
Market Bias : Mixed
Performance relative to USD:
- Weak industrial output is dragging on Japan’s recovery. The data points to a weak fourth quarter in 2022, and expectations are for an anemic start to 2023. Manufacturers are facing strong headwinds from declining exports and deteriorating consumer appetite.
- Questions around a new head of the Bank of Japan and therefore, future monetary policy continue, to swarm around the FX markets.
Current Change since Change since Dec. 31, 2021 Spot Dec. 31, 2021 Nov. 4, 2022 Nov. 4, 2022 AUD 0.7263 0.67 -7.1% 0.6285 6.9% CAD 1.2637 1.36 -7.7% 1.3733 0.9% CHF 0.9129 0.93 -2.3% 1.0145 7.9% CNH 6.357 6.90 -8.5% 7.3391 6.0% EUR 1.137 1.06 -7.0% 0.9743 7.9% GBP 1.3532 1.20 -11.1% 1.115 7.3% JPY 116.17 131 -12.3% 148.4 12.1%
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