Markets Report - 21 March 2023

A daily breakdown of the markets for the 21st March 2023, provided to you by Sterlex.

🇪🇺💶An interesting docket in the euro area will see the Economic Sentiment tracked by the ZEW institute in both Germany and the broader Euroland ahead of another speech by Chairwoman Lagarde. In the meantime, price action around the European currency should continue to closely follow dollar dynamics, as well as the potential next moves from the ECB in a context still dominated by elevated inflation, although amidst dwindling recession risks for the time being. The daily improvement in the pair comes despite the tepid rebound in the greenback and seems to follow the persevering hawkish narrative from some ECB-speakers, who appear to favour a 25 bps rate raise at the May event.

Further support for the European currency comes in response to another daily uptick in the German 10-year Bund yields, this time regaining the 2.20% barrier and beyond, a move that echoes the ongoing bounce in their US peers. EUR/USD trades with gains for the fourth session in a row and pushes higher following the recent breakout of the key 1.0700 barrier.

🇬🇧💷BoE Governor Andrew Bailey might continue hiking rates despite a decline in the inflationary pressures and potential banking crisis as the scale of CPI is extremely high. While the core CPI that excludes oil and food prices would remain steady at 5.8%. On the United Kingdom front, a power-pack action is expected from the Pound Sterling this week amid the monetary policy announcement by the Bank of England (BoE) and the UK’s inflation data. Wednesday’s Consumer Price Index (CPI) will be followed by Thursday’s BoE interest rate decision. According to the consensus, the BoE would hike rates further by 25 basis points (bps) to 4.25%.

“We see the BoE remaining on the back foot, as 1) the budget was largely supply side focused, 2) private sector pay cooled a touch more than we had expected, and 3) the global backdrop now includes elevated uncertainty and financial stability concerns.” - Morgan Stanley

“We now expect the BoE to be the first among its G3 peers to pause at its upcoming meeting, in contrast with the Fed and the ECB where they see a string of 25 bps hikes in the upcoming meetings.” - Morgan Stanley. As per the estimates, the annual headline CPI is expected to trim to 9.8% from the former release of 10.1%.

🇺🇸 🏦Early Tuesday, the US Dollar Index holds steady slightly below 103.50 and the 10-year US T-bond yield fluctuates between 3.4% and 3.5%. The index so far reverses three consecutive daily pullbacks, including Monday’s drop to multi-week lows around 103.30, amidst some mild selling pressure in the risk complex and the flat performance in US yields across the curve. US stock index futures are up around 0.2%, reflecting a slight improvement in risk sentiment. In the meantime, and according to CME Group’s FedWatch Tool, the probability of a 25 bps rate hike by the Fed on Wednesday hovers around the 80%, although investors are expected to closely follow any suggestion by the Committee that the Fed could pause its tightening cycle in the relatively near term.

Data wise in the US, the only release of note will come from the Existing Home Sales for the month of February.