Pound sterling

Sterling steady as gloomy data highlights recession risks. Photo by Toa Heftiba on Unsplash

Sterling steady as gloomy data highlights recession risks

Recent data has shown increasing signs of a recession in the UK, with Sterling losing value against the Dollar.

Pound sterling

Sterling steady as gloomy data highlights recession risks. Photo by Toa Heftiba on Unsplash

Recent data has shown increasing signs of a recession in the UK, with Sterling losing value against the Dollar.

British Pound Sterling

Reuters: Sterling steadied on Thursday, but headed for its first weekly loss against the dollar in a month, after data this week underscored the task facing the Bank of England in controlling inflation without damaging an economy already in recession. A series of business confidence and activity surveys this week have painted a picture of an economy under pressure from double-digit inflation and squeezed consumers and corporates. Sterling has lost 0.1% in value against the dollar this week so far, its first weekly decline against the U.S. currency since the week ending December 23. But it’s still on course for its fourth-successive monthly rally against the greenback, with a gain of 2.5% in January, marking its best performance in the first month of the year since 2019.

This is more a function of what investors believe about the likely path of interest rates in the United States and Britain. Money markets show traders believe the Federal Reserve has, at most, half a percentage point more in hikes to go before rates peak just shy of 5%. Markets show the Bank of England meanwhile, has almost a full percentage point to go before UK rates top out around 4.4% by August. “Alarming figures released over the last week have acted to sap sterling of the confidence and optimism given to it by the news of recession dodging 0.1% month-on-month growth in November,” CaxtonFX strategist David Stritch said. “Figures suggested that the number of British business at risk of going bust has increased by 33% in a year. With rumbling strike action and no news on Northern Ireland, sterling traders will be left wondering when the good times will come again.” Sterling was last flat against the dollar at $1.2389, and was broadly steady against the euro at 88.01 pence.

The BoE meets next week for the first time this year. Traders are widely expecting a half-point rise in interest rates to 4.00%, which would be the most since late 2008. Deutsche Bank senior economist Sanjay Raya said he expected the BoE’s Monetary Policy Committee to raise rates to 4% in its “last ‘forceful’ hike” in the tightening cycle. “With inflation past the peak, and forward looking data continuing to point to both sluggish growth and easing price pressures, the MPC could opt to slow the pace of hikes sooner rather than later,” Raya said. The euro has been a standout gainer lately and the pound has lost almost 0.5% against the European currency so far this week. As with the dollar, it’s mostly as a result of expectations for the European Central Bank, particularly in light of the number of officials that have reiterated the central bank’s determination to bring inflation down to its 2% target.

US Dollar

Reuters: The dollar edged higher against the euro on Thursday after data showed the U.S. economy maintained a strong pace of growth in the fourth quarter, backing the case for the U.S. Federal Reserve to maintain its hawkish stance for longer. Gross domestic product increased at a 2.9% annualised rate last quarter, the Commerce Department said in its advance fourth-quarter GDP growth estimate. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP rising at a 2.6% rate. A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21. “A somewhat mixed picture painted by the U.S. data,” said Stuart Cole, head macro economist at Equiti Capital in London.

The data point to an economy that is continuing to show resilience in the face of the rapid monetary tightening so far delivered by the Fed, Cole said. “But a big contributor to this growth story was inventories, a component that is almost certain to weaken as we go through 2023,” he said. “I think it reinforces the expectation of the Fed moving to 25 basis points moves now,” Cole said. The euro was 0.23% lower at $1.08895, but not far from the nine-month high of $1.09295 touched on Monday. Against the yen, the dollar was up 0.54% at 130.275 yen. Attention now turns to next week’s central bank meetings, including the Federal Reserve and the European Central Bank. Traders broadly expect the Fed to increase rates by 25 basis points next Wednesday, a step down from a 50 bps increase in December. Meanwhile, the ECB has all but committed to raising its key rate by half a percentage point next week.

Sterling was about flat on the day against the U.S. dollar, on pace to log a narrow gain for the week, its third straight weekly rise, even as traders remained concerned about the task facing the Bank of England in controlling inflation without damaging an economy already in recession. The Aussie touched a new 7-month high of $0.71425 on growing expectations that more Reserve Bank of Australia interest rate hikes are due after data showed Australian inflation surged to a 33-year high last quarter. The Canadian dollar rose to a two-month high against its U.S. counterpart on Thursday, a day after the Bank of Canada raised interest rates as expected in a move that could mark the end of the central bank’s aggressive tightening campaign. Meanwhile, bitcoin was little changed on the day at $23,123, continuing to tread water after having jumped by about a third in value since early January, following big losses spurred by the high-profile collapse of the FTX crypto exchange.

South African Rand

Reuters: Emerging market stocks extended their rally for a fifth straight session on Thursday, while South Africa’s rand eked out slim gains ahead of an interest rate decision later in the day that is seen delivering the last hike of the cycle. The MSCI’s index of emerging market stocks rose 1.1% by 0820 GMT, hovering near seven-month highs, while currencies ticked 0.1% higher. South Africa’s rand ZAR rose 0.1% against the dollar as investors stayed away from placing big bets ahead of the central bank’s interest rate decision. Economists in a Reuters poll were split on the size of the increase with 11 of 20 economists expecting the Reserve Bank to hike rates by 50 basis points to 7.50%, while eight project an increase of 25 bps and one economist forecasted no change.

Further, hopes that South Africa’s government will next month lay out plans to take on a majority of the debt owed by beleaguered state utility Eskom lifted the company’s bonds, providing some relief to investors facing a long and uncertain wait. The Turkish lira was flat to higher against the greenback. Turkey’s central bank said it will provide 2% foreign exchange conversion support to companies that bring forex into the country from abroad, sell it to the central bank and pledge not to buy forex for a period determined by the bank. The rouble hit a more than one-week low against the dollar before paring some losses as the market waited for next week’s month-end tax payments that will likely benefit the Russian currency. The Hungarian forint slipped 0.5% against the euro after two straight sessions of gains, while other central and eastern European currencies were subdued. In Asia, the Export-Import Bank of China confirmed it has provided Sri Lanka with a two-year moratorium on its debt service payments, China’s foreign ministry said. The Pakistani rupee plummeted against the dollar, according to trade data, in a second day of turmoil in the domestic currency market after unofficial controls were removed.

Overall, trading in emerging markets remained thin with China still away for the Lunar New Year.

Global Markets

Reuters: Asian stocks rose on Friday and were poised for their fifth straight week of gains after data highlighted a resilient U.S. economy, boosting investor sentiment ahead of next week’s slate of central bank policy meetings. MSCI’s broadest index of Asia-Pacific shares outside Japan rose as much as 0.55% to hit an almost nine-month high of 562.10. The index, which fell nearly 20% last year, is up about 11% so far this month and is on course for its best-ever January performance. Japan’s Nikkei rose 0.07%. European stock futures indicated that stocks were set to rise, with the Eurostoxx 50 futures up 0.31%, German DAX futures 0.28% ahead and FTSE futures up 0.17%. The U.S. economy grew faster than expected in the fourth quarter as consumers boosted spending on goods, data showed, but it could be the last quarter of solid GDP growth before the lagged effects of the Federal Reserve’s jumbo interest rate hikes are fully felt.

A separate report showed that labour market remains tight and could lead the Fed to keep interest rates higher for longer. Ashwin Alankar, head of Global Asset Allocation at Janus Henderson Investors, said the headline GDP suggested robust economic activity and if a recession were to materialize it would be a shallower one. “Overall GDP data was a ‘tale-of-two cities’ – good overall growth stemming from less-than-ideal drivers and prices mitigating but at a rate that is worrisome.” Hong Kong’s Hang Seng Index gained 0.13% after surging more than 2% on Thursday. Mainland China markets are due to resume trading on Monday after the Lunar New Year holiday. Thursday’s set of data has raised investor hopes of a soft landing – a scenario in which inflation eases against a backdrop of slowing but still resilient economic growth. Futures are pricing in a 94.7% probability of a 25-basis-point hike next Wednesday and see the Fed’s overnight rate at 4.45% by next December, or lower than the 5.1% rate Fed officials have projected into next year.

Data on U.S. personal consumption expenditures due at 1330 GMT will provide further clues on inflation. “The disinflation impulse is likely to stretch further, as has been evident from CPI releases lately, likely continuing to build a case for a 25 basis point rate hike by the Fed next week,” Saxo strategists said. Next week will also feature Bank of England and European Central Bank meetings that will indicate the monetary policy path those central banks are likely to take. Hong Kong’s Hang Seng Index gained 0.13% after surging more than 2% on Thursday. Mainland China markets are due to resume trading on Monday after the Lunar New Year holiday. Elsewhere in Japan, core consumer prices in Tokyo, a leading indicator of nationwide trends, rose 4.3% in January from a year earlier, marking the fastest annual gain in nearly 42 years. The Japanese yen strengthened 0.34% to 129.78 per dollar as the data reinforced market expectations that quickening inflation could nudge the Bank of Japan to move away from its ultra-easy policy. “

We still think the policy change is a long way off,” ING regional head of research Robert Carnell said. “The spring salary negotiations are key to watch as wage growth is a prerequisite for sustainable inflation.” The dollar index , which measures the U.S. currency against six other peers, rose 0.12%, with the euro down 0.11% to $1.0877. Sterling was last trading at $1.2393, down 0.10% on the day. Oil prices rose on expectations of a boost to demand from China’s reopening and after the strong U.S. data. U.S. West Texas Intermediate crude rose 0.33% to $81.28 per barrel and Brent was at $87.75, up 0.32% on the day.

Published by the Mercury Team on 27 January 2023

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