February 08, 2023

Daily Report 08/02/2023

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Sterling remained under pressure after Tuesday’s European open with a test of support against the dollar. Overall risk conditions were generally more cautious, especially with concerns that a more hawkish Federal Reserve stance could lead to further US and global economic damage. Bank of England comments during the day were limited to a potential digital currency with no further commentary on interest rates. Overall, Sterling dipped to 1-month lows against the dollar before being subjected to high volatility following Fed Chair Powell’s comments.

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BoE Monetary Policy Report Hearings

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The Euro was unable to make any headway ahead of Tuesday’s New York open with the dollar holding firm amid expectations of relatively hawkish rhetoric from Fed Chair Powell while equities remained fragile. ECB council member Nagel stated that it would be dangerous to think that the inflation problem is solved. He added that more significant rate increases are needed and that rate cuts are not on the agenda. Overall, the Euro lost further ground ahead of Powell’s comments with 1-month lows as the on-going correction continued.

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EU leaders summit

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Fed Chair Powell repeated comments that the disinflation process is underway in the economy, but it has a long way to go. In particular, Powell stated that the Fed is not seeing disinflation in the core services sector and that rates will need to stay high to achieve this key element. He added that the lack of progress in core services excluding housing is what worries him, although he was more confident of disinflation in the housing sector. He reiterated that the central bank is data dependent and that rates could be raised higher than is priced in if the data is stronger than expected. Powell also considers that the labour market remains extremely tight and this may be a structural issue. He did, however, add that wage increases have reduced to a level closer to a sustainable level.  There was very choppy trading surrounding Powell’s comments with the dollar initially sliding before a rapid recovery.

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