Sterling was unable to make further headway after Wednesday’s European open with selling interest against the dollar while the Euro also managed to find support. There was a reluctance to chase the currency higher after Tuesday’s surge. Markets were continuing to monitor developments surrounding the Northern Ireland protocol with some disappointment that no deal had been reached by now. Money markets are pricing in close to a 100% chance that the Bank of England will increase interest rates by a further 25 basis points at the March policy meeting with peak rates close to 4.75%. Sterling will be vulnerable if there are fresh doubts surrounding a rate hike in March or the peak level of rates.
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The German IFO index edged higher to 91.1 for February from a revised 90.1 the previous month, but slightly below consensus forecasts of 91.4. Although there was a significant increase in the expectations index, this was offset by a small decline in the current conditions component. The IFO stated that Germany will not escape recession, but that the downturn is likely to be mild. There was a further net easing of supply bottlenecks for the month while a smaller proportion of companies want to increase prices. The data overall triggered some reservations over the outlook ECB council member Villeroy stated that markets had over-reacted to strong US data releases and ECB communication.
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There was an element of caution ahead of the Federal Reserve minutes with a firm dollar tone. The minutes stated that several participants advocated rising interest rates by 50 basis points at the policy meeting, although almost all members eventually agreed that a 25 basis-point hike was appropriate. As far as inflation is concerned, members stated that inflation had eased, but they needed to see more progress and that the tight labour market would contribute to upward pressure on inflation Participants considered that risks to the economic outlook were skewed to the downside and some considered that the risk of recession in 2023 had increased.
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