Daily FX Update

The Labour party has claimed it has discovered evidence of a “scandalous catalogue of waste” by UK government departments, involving taxpayer-funded debit cards. They claim that expenses have risen sharply as well as cases of misreporting - Labour hopes the data out this morning will reopen questions around the Conservatives spending of public money.

UK pubs closures in 2022 were near the highest in a decade - more than 500 businesses folded (up 56 per cent from the previous year) with the sector struggling with rising costs and lower demand.

UK businesses plan to cut hiring as the economic outlook darkens, but a shortage of workers means they’ll pay at record rates for the staff they need, according to BDO's report. A report by CIPD found however that the typical employer is planning to increase pay by 5%, the highest level since records began. These reports add to evidence that the inflation will continue to print well above the BOE's 2% target, whilst the economy stagnates - inflation and wages are two key data points that influence the BOE's decisions. 

GBPUSD sits in the 1.2050 region as we print, following a dip just before Friday London close. GBPEUR sits in the 1.1283 region after gaining over 1% last week. The FTSE has gain 0.29% since London open.

A quiet day on the data front for the Euro Area, leaves investors paying close attention to the Eurogroup meeting in Brussels, where ECB President Lagarde will be in attendance. Monetary policy, the economy and inflation are expected to be the main topics of conversation, with the Bulletin pre-release likely to be the main focus for the day. EURUSD has opened the week unchanged, trading around 1.0680 at time of writing.

ECB policymaker Centeno commented this morning that rate decisions beyond March will be dependent on data releases, however so far inflation is dropping at a faster pace than expected. He cited that March inflation forecasts will be key to help determine the peak rate.

European stocks edged higher, with food and beverage stocks leading gains. The Stoxx 600 added 0.2% on London open. Oil fell, as Russia’s plans to withdraw supply was overshadowed by global growth concerns. European gas prices dropped to the lowest level in nearly 4 months, as fears of unstable power through the remainder of the winter months subsided. Milder weather and high inventories curbed concerns. Benchmark futures fell as much as 4.5%. 

Last week was the week in which the markets started to absorb the Federal Reserve rhetoric that rates will stay higher for longer. To support this consumer sentiment and jobless claims highlighted the remaining resilience of the US economy, echoing the signals given by the previous weeks Jobs data.  When Jerome Powell first spoke following the Fed’s decision to hike by 0.25%, markets didn’t react as the FOMC would’ve hoped. After last week, they have begun to adjust their expectations, although rate cuts are still priced in towards the end of 2023.

The shock surprise in the ADP jobs report, has helped to bolster consumer sentiment. Consequently, optimism has grown surrounding the Federal Reserve ability to achieve a soft landing. The dollar’s price action remains relatively muted to start the week.

India’s Jan CPI print is expected to hold at 5.7%. Food inflation is set to ease following a government program which now offers wheat and rice for free. The RBI continued to keep the door open to further tightening.

Japan’s GBP is expected to rebound in 4Q 22. Domestic travel subsidies and an influx of foreign tourist is expected to drive a pickup in the services sector.

As the Shekel depreciates against the dollar following an injection of political uncertainty and instability, this may weigh on the Bank of Israel’s policy decision next week. The current expectation is for a 0.25% hike; however, a weaker shekel implies that imported goods, and commodities become more expensive, which could turbocharge inflation. This may shift the central bank towards opting for a 0.5% hike next week.

EC published economic forecasts

India CPI

Japan GDP