Markets Report - 23 January 2023

A daily breakdown of the markets for the 23rd January 2023, provided to you by Sterlex.

🇪🇺💶Over the weekend, European Central Bank (ECB) Governing Council member and Governor of Austria's central bank Olli Rehn said he sees grounds for "significant interest rate increases" from the ECB this winter and the coming spring. A bullish wildcard for the Euro could come from any further comments on new joint EU bond issuance to support green investments, as European politicians attempt to support local industry in the face of President Biden's Inflation Reduction Act. EUR/USD gained traction to start the week and touched its highest level since mid-April above 1.0900. Meanwhile, the findings of a recently conducted Reuters poll showed that the ECB is forecast to opt for a 50 basis points (bps) hike at its February monetary policy meeting, while the policy rate is expected to reach 3.25% by mid-year. Germany's Ifo on Wednesday will be particularly interesting to see whether the expectations component picks up anywhere near as sharply as the German ZEW investor survey. However, economists at ING expect the pair to remain below the 1.0950/1000 region.

🇬🇧💷The firming up of BoE tightening expectations has allowed Sterling to match this year's strength of the Euro. The news also adds that Finance minister Jeremy Hunt is expected to announce pro-growth measures in a budget statement in March. But Danker feared the government might temper its reforms as an election, expected in 2024, approaches. And certainly, there has been a marked improvement in the perception of UK sovereign risk as evidenced by the five-year sovereign CDS trading back down to 22 bps last week. It’s worth noting that the downbeat UK inflation and jobs report joined softer British Retail Sales to probe the hawkish concerns surrounding the Bank of England in the last week. The news praised Sunak’s efforts to diffuse budget fears emanating from the previous government but marked the need for action to match the growth prospects of the US and European Union. Britain is falling behind its peers in the race to spur economic growth and Prime Minister Rishi Sunak must act now to boost investment, fix a lack of workers and avoid chaos over post-Brexit rules, Confederation of British Industry (CBI) Director-General Tony Danker said on Monday per Reuters. The market now prices a 45 bps Bank of England (BoE) hike at next week's meeting.

🇺🇸 🏦The market mood seems to have turned cautious with the US stock index futures trading modestly lower on the day, while the benchmark 10-year US Treasury bond yield stays slightly below 3.5% following Friday's decisive rebound. This view, however, also comes in contrast to the hawkish message from the latest FOMC Minutes and recent comments from fed’s rate-setters, all pointing to the need to advance to a more restrictive stance and stay there for longer, at the time when rates are seen climbing above the 5.0% mark. The US economic docket will feature the Federal Reserve Bank of Chicago's National Activity Index for December. The US Dollar started the new week under modest bearish pressure and the US Dollar Index declined below 102.00 during the Asian trading hours on Monday. Later in the session, Germany's Bundesbank will publish its monthly report and the European Commission will release the preliminary Consumer Confidence Index for the Euro area. The idea of a probable pivot in the Fed’s policy continues to weigh on the greenback and keeps the price action around the DXY depressed.