BRITISH POUND
The GBP/USD exchange rate is around 1.2150 this morning, according to Reuters, following advances following the U.S. payrolls report on Friday, which revealed symptoms of a weakening U.S. economy. Today, the pound is up 0.10 percent against the euro, trading at 87.93 pence.
Even while the pound remains close to a six-month high reached in mid-December, the future for the British economy is bleak due to predictions of a recession, high inflation, and a cost-of-living problem. As new orders dried up in the face of rising interest rates and broader cost concerns, British construction activity plummeted at its fastest rate since May 2020, according to a Friday poll.
A survey released on Thursday revealed that the British services industry finished 2022 in a lackluster manner, with new orders decreasing and hiring remaining stagnant in December, indicating that Britain is likely currently in recession. “Growth differentials are also at play for the pound, and we believe that deteriorating sentiment indicates that this downward momentum can be sustained,” Harvey added.
Earlier in the week, the S&P Global/CIPS UK manufacturing Purchasing Managers’ Index (PMI) decreased to 45.3% in December from 46.5% in November. This is the lowest reading since May 2009, with the exception of two months at the beginning of the COVID-19 pandemic in 2020. Since December 2021, the BoE has raised interest rates nine times in an effort to reduce inflation, which is reaching a 41-year high, while avoiding a severe recession.
US DOLLAR
Reuters: China’s reopening of its borders and rising hopes that the Federal Reserve could decrease the pace of its interest rate hikes increased risk sentiment on Monday, which weighed on the U.S. dollar. On Monday, the British pound rose 0.42 percent to $1.2143, after gaining 1.5 percent on Friday. The euro was up 0.2% at $1.0674, after closing Friday up 1.17 percent.
In December, the U.S. services industry activity contracted for the first time in more than two and a half years, providing fresh evidence of an economic slowdown. “Friday’s data gave the market a glimmer of hope that the U.S. may be decelerating and that the Fed may not need to do much more,” said Moh Siong Sim, currency analyst at Bank of Singapore. The judgment is still out on whether a soft landing scenario is in fact imminent.
According to analysts, Fed members are likely to maintain their hawkish stance due to the labor market’s continued tightness. “Right now, wages and inflation are softening, but the job market remains overheated,” Sim said. A month ago, the Fed fund futures implied a 50% chance of a half-point raise in February. Now, they imply a 25% possibility. The U.S. central bank boosted interest rates by 50 basis points last month, following four consecutive 75 basis point hikes in 2015, but stated that it will likely maintain rates up for a longer period of time in order to combat inflation.
The dollar index, which compares the U.S. dollar to six major currencies, declined 0.145% to 103.570 on Monday, following a drop of 1.150% on Friday, as investors shifted their focus to riskier assets. The easing of China’s strict ‘zero-COVID’ policy by reopening its borders and allowing air, land, and sea travelers to enter the nation also contributed to a positive atmosphere. Monday, the Chinese yuan reached a near five-month high versus the U.S. dollar due to optimism for a speedy economic recovery. The trade and China-sensitive Australian dollar jumped 0.80% against the U.S. dollar to $0.693, its highest level since August 30, while the New Zealand dollar rose 0.68 % to $0.639, its highest level in three weeks.
Elsewhere, the Brazilian real had yet to trade following the arrest of supporters of former far-right President Jair Bolsonaro for entering the country’s Congress, presidential palace, and Supreme Court.
The next Fed meeting is slated for the beginning of the next month, so investors will scrutinize the consumer price index data due on Thursday and a speech by Fed Chair Jerome Powell this week for hints about the central bank’s next move. Citi predicts another “softer” core CPI print with modest upside potential, but core inflation might pick up again in early 2023, the company said. We continue to anticipate that the Fed will raise rates by 50 basis points in February, as underlying inflationary pressures remain robust and additional easing of financial conditions would likely not be desirable.
To 131.59 per dollar, the Japanese yen increased by 0.37 percent. Amir Anvarzadeh, market strategist at Asymmetric Advisors, forecasts that the Asian currency will continue to move towards 120 or lower this year, as rising inflationary pressures in Japan will force policymakers to further adjust yield curve control and ultimately pivot away from quantitative easing.
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SOUTH AFRICAN RAND
South Africa’s rand depreciated against the dollar in early trading on Friday, according to Reuters, before gaining some ground following the release of U.S. employment statistics indicating a weakening economy. In comparison to the other major currencies that gained from a weaker USD, the rand closed the week down.
Similar to most currencies on emerging markets, the rand is highly subject to global factors such as U.S. monetary policy. The yield on the government’s benchmark 2030 bond was unchanged at 10.060% in early transactions.
GLOBAL MARKETS
Reuters: The outlook for the global economy improved on Monday as forecasts for less aggressive U.S. rate hikes and the opening of China’s borders boosted investor sentiment. MSCI’s broadest index of Asia-Pacific equities excluding Japan climbed 2.0% to a five-month high, with South Korean equities advancing 2.2%. The Chinese blue chips increased by 0.7%, while Hong Kong stocks increased by 1.4%. The Chinese yuan strengthened to its highest level since mid-August, below 6.8000.
The Nikkei was closed for the holiday, although futures were trading at 26,215 as opposed to Friday’s cash close of 25,973. S&P 500 futures rose 0.2%, while Nasdaq futures increased 0.3%. Futures on the EUROSTOXX 50 rose 0.6%, while futures on the FTSE rose 0.3%. The earnings season begins this week with the major U.S. banks, with Wall Street anticipating minimal year-over-year earnings growth. Analysts at Goldman Sachs noted, “Excluding Energy, S&P 500 EPS (earnings per share) is expected to fall 5% due to margin compression of 134 basis points.” “Entering reporting season, sentiment towards earnings revisions is negative relative to historical norms. “We anticipate additional downward revisions to consensus EPS forecasts for 2023,” they added. The reopening of China represents an upside risk to 2023 earnings per share, but margin pressures, taxation, and recession pose higher downside risks. As Goldman prepares for a difficult economic climate, there are allegations that the company may begin laying off thousands of employees on Wednesday.
Since the commencement of the COVID-19 epidemic in Asia, Beijing has opened borders that had been all but closed, allowing an increase in national traffic. Winnie Wu, an analyst at Bank of America, thinks that China’s economy, the second-largest in the world, would experience a cyclical upturn in 2023 and market upside from both multiple expansion and 10% EPS growth. Last week, Wall Street sentiment was buoyed by a combination of good U.S. payroll gains, slower wage growth, and a steep decline in service-sector activity. The market reduced its wagers on Federal Reserve rate hikes. Futures on Fed funds indicate a 25% possibility of a quarter-point raise in February, down from 50% a month earlier. This will make investors extremely sensitive to any remarks made by Fed Chair Jerome Powell at Tuesday’s central bank conference in Stockholm. It also increases the significance of Thursday’s U.S. consumer price index (CPI) data, which is anticipated to show annual inflation easing to a 15-month low of 6.5% and the core rate falling to 5.5%.
John Briggs, an analyst at NatWest Markets, stated, “NatWest’s CPI forecasts are lower than the consensus, and if accurate, this will likely cement market pricing at 25bps versus 50bps.” “It should still be viewed in the context of a Fed that is likely to raise rates a few more times and then maintain them until inflation’s decline is assured – for us, this means a funds rate between 5.5 and 5.25 percent.” The conflicting statistics released on Friday had already caused 10-year U.S. Treasury yields to tumble 15 basis points to 3.57%, while pushing the U.S. currency down across the board.
On Monday morning, the euro was unchanged at $1.0673 after recovering from a low of $1.0482 on Friday. The dollar fell to 131.48 yen from last week’s peak of 134.78 yen, while its index remained unchanged at 103.600. After hundreds of supporters of former far-right President Jair Bolsonaro were detained for entering the country’s Congress, presidential palace, and Supreme Court, the Brazilian real had yet to trade. Read further. The decline in the dollar and yields benefited gold, which reached an eight-month high near $1,877 per ounce.
After a roughly 8% decline last week due to demand concerns, oil prices stabilized. Brent jumped 80 cents to $79.37 per barrel, but U.S. crude climbed 78 cents to $74.55 per barrel.
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