March 23, 2023

Daily Report 23/03/2023

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Sterling posted gains after the higher than expected UK inflation data, especially as there was a shift in expectations surrounding the Bank of England policy decision this week. Markets moved to price in close to a 100% chance that the central bank would increase interest rates by 25 basis points to 4.25%. The CBI industrial orders index dipped to -20 for March from -16 the previous month and weaker than expectations of -15. According to the CBI, output and orders eased in the three months to March while there was a slowdown in inflation pressures with weakening selling-price expectations. Sterling failed to hold the gains and drifted lower into the European close. The Northern Ireland protocol was approved by a larger majority in the House of Commons, but economic developments dominated. Consensus forecasts are that the Bank of England will raise rates to 4.25% with the rhetoric on a potential pause in hikes watched closely given the change in Fed guidance. Risk trends will also be significant for the Pound.

Key Data

12.00 Bank of England Interest Rate Decision Exp. 4.25% Curr. 4%
12.00 Bank of England Minutes
12.00 Bank of England Monetary Policy Summary

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The Euro-Zone recorded a current account surplus of €17.1bn for January from €13.3bn the previous month, maintaining the underlying improvement seen over the past few months. Narrow ranges prevailed ahead of the Federal Reserve decision with the Euro edging higher before settling.

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The Fed increased interest rates by 25 basis points to 5.00%, in line with consensus forecasts and the vote was unanimous. There was a shift in the statement with the committee now considering that rate hikes may be needed as opposed to comments last time that it anticipated that on-going rate hikes would be appropriate. In the latest projections on interest rates the dot plots forecast rates at 5.1% this year, unchanged from the previous estimate. The 2024 forecast was raised slightly to 4.3% from 4.1%, but the committee still expects that rates will decline next year. There was fresh speculation that rates may have peaked. Chair Powell remained uneasy over the inflation outlook, especially as there had been no progress in reducing core inflation outside the housing sector. He added that there was still a long way to go in the process of getting inflation back down to 2%. According to Powell, recent baking events might result in tighter credit conditions which would have an impact on the economy and how the Fed responds. Powell also indicated that credit conditions will be an important element and, in principle, can be seen as equivalent to a rate hike and that monetary policy will have less work to do.

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