February 20, 2023

Daily Report 20/02/2023

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Sterling was unable to gain support from the latest retail sales data in early Europe on Friday and dipped to lows against the dollar. The mood turned more positive later in the session, especially with UK equities holding firm and close to record highs while risk conditions stabilised. There was also an element of support from hope that there would be agreement to amend the Northern Ireland protocol. Sterling gradually regained ground and moved back higher against the dollar.

Prime Minister Sunak played down the potential for a deal on Northern Ireland and there was further political tensions, although the market impact was limited. Elsewhere, Rightmove reported an annual increase in house prices of 3.9% from 6.3% previously with prices static on the month.

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The Euro-Zone current account surplus widened to EUR15.9bn for December from EUR12.8bn the previous month and well above consensus forecasts of EUR5.1bn.For 2022 as a whole, the there was a deficit of EUR106bn and 0.8% compared with a surplus of EUR282bn and 2.3% of GDP in 2021. There was, however, a much stronger position for the fourth quarter of the year as energy prices declined. A stronger current account position will provide some underlying Euro support ECB council member Schnabel stated that a 50 basis-point rate hike is needed for March under all scenarios and that the bank is still far away from claiming victory in the inflation battle. She added that there was a risk that markets will under-estimate inflation. Fellow council member Villeroy stated that the question of rate-cut timing is surely not a question for this year, but he does see rates peaking this summer.

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Consumer Confidence Prev -20.9 Exp -19

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The broad-based US Dollar (USD) strength weighed heavily on GBP/USD in the second half of last week. Hawkish comments from Fed policymakers and the latest macroeconomic data releases revived expectations that the Fed could opt to do additional rate hikes even after May. In turn, the benchmark 10-year US Treasury bond yield advanced to its highest level in nearly three months above 3.9% and provided a boost to the USD. According to the CME Group FedWatch Tool, markets are pricing in a nearly 60% probability that the Fed will at least rise its policy rate three more times by 25 basis points, compared to only 40% a week ago. Elsewhere, US import prices declined 0.1% for January after a revised 0.8% decline the previous month. Although prices increased 0.8% over the year, this was the seventh successive monthly decline and the annual comparison will turn negative next month.

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