March 08, 2023

Daily Report 08/03/2023

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In comments on Tuesday, Bank of England Monetary Policy Committee member Mann stated that she was concerned about the persistence of core inflation and that she thinks more needs to be done with interest rates. She also strayed on to the subject of currencies and warned that the Pound could face downward pressure if investors have not yet fully priced in hawkish messages from the Federal Reserve and ECB. She added that there could be more Sterling depreciation if it’s not priced in. The comments unsettled Sterling to some extent with a quick move lower against the US Dollar.

Global developments had a more substantial impact in undermining the currency after the New York open. Hawkish rhetoric from Fed Chair Powell triggered direct selling as the dollar posted sharp gains and the slide in equities also undermined the UK currency as global risk appetite deteriorated. Sterling slumped to 2023 lows against the dollar with the Euro also posting gains to 2-week highs against the Pound.

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The Euro was unable to make any headway after Tuesday’s European open with the stronger than expected German factory orders data unable to provide significant support. ECB council member Knot stated that the ECB can be expected to increase interest rates for quite some time after March.

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In prepared remarks to the Senate Banking Committee, Fed Chair Powell stated that the latest data had been stronger than expected, particularly for inflationary pressures. He also reiterated that there was little sign of disinflation so far in core services excluding the housing sector. Powell also stated the Fed is prepared to increase the pace of rate hikes if the totality of incoming data indicates that faster tightening is warranted. In this context, he also noted that the dot plots of interest rate forecasts at the March meeting may well be higher than in December. He also rejected the argument that the Fed has over-tightened. He did, however, add that the bank has significant data to see ahead of the March policy meeting and that there are many unusual factors affecting inflation. He also expects housing inflation to moderate in the next 6-12 months, but the overall tone was hawkish.

Following Powell’s hawkish overall testimony, there was a notable shift in Fed Funds futures with markets pricing in a 65% chance that the Fed will increase rates by 50 basis points to 5.25% at the March meeting. Equities declined sharply and the dollar posted strong gains with the Euro dipping to lows near 1.0550.The dollar edged higher again on Wednesday with the trade-weighted index at 3-month highs while the Euro posted 2-month lows around 1.0525. The latest ADP jobs data will be watched closely on Wednesday for further evidence on the labour market, especially as last month’s data was substantially weaker than the BLS employment report.

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ADP Employment Change(Feb) Prev 106k Exp 200k