RedFX Update: 2023 USD bounces back, GBP press
USD: United States of America
The USD started 2023 on a stronger footing and this evening’s Fed meeting minutes will shed some more light on discussions surrounding the path of interest rates. The Fed is expected to start slowing the pace of rate increases in Q2 this year and tapering rates throughout 2023 if necessary. All guidance in speeches will be closely watched.
EUR: EUROPE
The ECB pushed the EURO currency higher at the end of 2022 with aggressive rhetoric confirming that the Central Bank will keep raising rates to battle inflation. Last night, ECB member Kazaks said there will be “significant increases” in the February and March rate meetings.
The data is starting to show inflation easing ... Harmonised Index of Consumer Prices (HICP), the European Central Bank's preferred gauge of inflation, edged lower to 9.6% from 11.3%, compared to analysts' estimate of 10.7%.
Yesterday, German inflation data declined to 8.6% in December's flash estimate from 10% in November. This reading came in lower than the market expectation of 9%
GBP: United Kingdom
Domestically, PM Sunak will make his first speech of 2023 this afternoon – outlining some broad-brush policy aims for the UK in 2023.
In general, economists agree that the UK is ‘battling headwinds’ internally and externally, with the IMF forecasting UK growth to be negative in 2023 – the worst performer of the G7 nations. This is despite a strong labour market (we cannot forget the November payroll increased more than double what was expected).
GBP/EUR has tumbled from 1.1650 to 1.1300 as the EURO has rallied in Dec22. GBP/USD has risen to 1.2000 as the USD has weakened (GBP/USD was around 1.1500 in Q4 22)
In its latest Financial Stability Report, the Bank of England said that financial pressures on UK companies, especially for smaller firms, are expected to rise in 2023.
There is "Low risk at present of large or rapid fall in foreign investor demand for UK assets."
AUD: Australia
Boosted overnight as reports suggesting that China was considering a partial end to its ban on imports of Australian coal seem to have provided a boost to the Australian Dollar (AUD/USD at 0.6800). After 300bp of interest rate hikes in 2022, the Central Bank expects the full effects of the hikes to be felt now – bringing the economy and inflation back into some sort of equilibrium.
RMB: People's Republic of China
China: The overnight headline grabber was “.. the economic recovery is still not solid. Risks include a contraction in demand and disruptions to supply” from the Finance Minister. However, with Covid restrictions lifted, the equity markets show optimism regarding the continued economic growth from China.
