Recent data indicate that the United Kingdom is entering a recession, with the pound losing value against the dollar.
BRITISH POUND STERLING
Reuters: The pound stabilized on Thursday, but was on track for its first weekly loss against the dollar in a month, as this week’s statistics highlighted the difficulty the Bank of England faces in limiting inflation without further harming an economy in recession. This week, a number of company confidence and activity surveys depicted a picture of an economy under strain from double-digit inflation and squeezed consumers and corporations. So far this week, the pound has lost 0.1% versus the dollar, its first weekly fall against the U.S. currency since the week ending December 23. With a rise of 2.5% in January, the euro is on track for its fourth consecutive monthly surge versus the dollar, marking its best performance in the first month of the year since 2019.
This is a result of investors’ expectations for the future course of interest rates in the United States and the United Kingdom. Money markets indicate that traders expect the Federal Reserve has little more than a half-percentage point of rate rises left until rates reach a peak just below 5%. The markets indicate that the Bank of England has nearly a full percentage point to go before UK interest rates peak at 4.4% in August. David Stritch, a strategist at CaxtonFX, said that “alarming figures released over the past week have sapped sterling of the confidence and optimism it gained from the news of recession averting 0.1% month-over-month growth in November.” “According to the data, the number of British businesses at risk of failing surged by 33% in one year. With strikes brewing and no word on Northern Ireland, pound traders will be left wondering when the good days will return. Last seen at $1.2389 vs the dollar and 88.01 pence versus the euro, the value of the pound remained largely unchanged.
The BoE will convene for the first time this year next week. Traders anticipate a half-point increase in interest rates to 4.00%, the highest level since late 2008. Sanjay Raya, senior economist at Deutsche Bank, predicted that the Bank of England’s Monetary Policy Committee would raise interest rates to 4% in its “last ‘forceful’ hike” of the tightening cycle. “With inflation having passed its peak and forward-looking data pointing to both sluggish growth and easing price pressures, the MPC may opt to slow the pace of rate hikes sooner rather than later,” Raya stated. The euro has been a standout performer in recent times, and the pound has lost over 0.5% against the euro so far this week. As with the dollar, this is primarily due to expectations for the European Central Bank, especially given the number of officials who have reaffirmed the ECB’s intention to bring inflation down to its objective of 2%.
US DOLLAR
Reuters: Data indicating that the U.S. economy maintained a robust growth rate in the fourth quarter bolstered the argument for the U.S. Federal Reserve to retain its hawkish attitude for an extended period of time. According to the Commerce Department’s preliminary estimate of fourth-quarter GDP growth, the gross domestic product grew at an annualized rate of 2.9% in the previous quarter. The economy expanded at a rate of 3.2% during the third quarter. Reuters’ survey of economists predicted a 2.6% increase in GDP. Separate data from the Labor Department revealed that initial claims for state unemployment benefits decreased by 6,000 to 186,000 for the week ending January 21. “The U.S. data paint a somewhat mixed picture,” said Stuart Cole, chief macro economist at Equiti Capital in London.
The data indicate that the economy continues to demonstrate resilience despite the Fed’s aggressive monetary tightening, as stated by Cole. “However, a significant contributor to this growth story was inventories, a factor that will almost certainly weaken through 2023,” he stated. “I believe this strengthens the likelihood of the Fed moving to 25 basis point moves,” Cole said. The euro was 0.23 percent weaker at $1.08895, although not far off Monday’s nine-month high of $1.09295. At 130.275 yen, the dollar was up 0.54% against the yen. Next week’s central bank meetings, including the Federal Reserve and the European Central Bank, are now the focus of attention. Traders anticipate that the Fed will raise interest rates by 25 basis points next Wednesday, a reduction from the 50 basis point hike in December. Next week, the ECB is almost certain to increase its key rate by 0.5 percentage points.
Against the U.S. dollar, the British pound was mostly unchanged on the day, and was on track to post a tiny weekly gain, its third consecutive weekly gain, despite traders’ concerns over the Bank of England’s mission of reducing inflation without worsening an economy already in recession. The Australian dollar reached a new 7-month high of $0.71425 on rising expectations that the Reserve Bank of Australia will raise interest rates further after statistics revealed that Australian inflation reached a 33-year high in the previous quarter. The Canadian currency reached a two-month high versus the U.S. dollar on Thursday, a day after the Bank of Canada lifted interest rates as expected in a move that could signal the conclusion of the central bank’s aggressive tightening campaign. In the meantime, bitcoin was unchanged on the day at $23,123, continuing to tread water after gaining roughly a third of its value since early January due to the collapse of the FTX cryptocurrency exchange.
SOUTH AFRICAN RAND
Reuters: Emerging market equities continued their surge for a fifth consecutive day on Thursday, as South Africa’s rand eked out minuscule gains ahead of an interest rate decision expected to result in the cycle’s final boost. At 08:20 GMT, the MSCI index of developing market stocks was up 1.1%, lingering near seven-month highs, while currencies rose 0.1%. The South African rand ZAR appreciated 0.1% against the U.S. dollar as investors refrained from placing large wagers in advance of the central bank’s announcement on interest rates. Eleven of twenty economists in a Reuters survey expect the Reserve Bank to raise rates by 50 basis points to 7.50 percent, while eight economists predict a rise of 25 basis points and one economist predicts no change.
In addition, expectations that South Africa’s government will spell out plans next month to assume the majority of the debt owed by struggling state utility Eskom boosted the company’s bonds, providing some respite to investors facing a protracted period of uncertainty. The Turkish lira was flat to up against the U.S. dollar. The central bank of Turkey has announced that it will provide 2% foreign exchange conversion support to enterprises who bring foreign currency into the country, sell it to the central bank, and commit not to buy foreign currency for a period defined by the bank. The rouble fell to its lowest level versus the dollar in more than a week before reducing losses as the market awaited next week’s month-end tax payments, which are likely to support the Russian currency. After two consecutive sessions of advances, the Hungarian forint fell 0.5% against the euro, while other central and eastern European currencies remained muted. China’s foreign ministry acknowledged that the Export-Import Bank of China has granted Sri Lanka a two-year suspension on its debt service payments. According to trade statistics, the Pakistani rupee fell against the dollar for a second day on the domestic currency market after unofficial controls were lifted.
Due to China’s continued absence for the Lunar New Year, emerging markets remained sluggish overall.
GLOBAL MARKETS
Reuters: Asian equities advanced on Friday and were poised for their sixth consecutive week of gains after data indicated a healthy U.S. economy, bolstering investor mood ahead of next week’s central bank policy meetings. MSCI’s broadest index of Asia-Pacific equities outside Japan climbed as much as 0.55% to reach an almost nine-month high of 562.10. The index, which dropped over 20% last year, has gained approximately 11% so far this month and is on track for its best January performance ever. Japan’s Nikkei climbed 0.07%. The Eurostoxx 50 futures were up 0.31%, the German DAX futures were up 0.28%, and the FTSE futures were up 0.11%, indicating that stock prices would advance. The U.S. economy grew faster than anticipated in the fourth quarter as consumers increased their spending on products, according to data. However, this could be the last quarter of decent GDP growth before the Fed’s massive interest rate hikes take full impact.
A separate survey revealed that the labor market remains tight, which could prompt the Fed to maintain higher interest rates for an extended period of time. Head of Global Asset Allocation at Janus Henderson Investors, Ashwin Alankar, stated that the headline GDP indicated healthy economic activity, and if a recession were to emerge, it would be shallower. “Overall GDP data was a ‘tale of two cities,’ with good growth resulting from less-than-ideal drivers and prices decreasing at a worrisome rate.” After gaining over 2% on Thursday, the Hang Seng Index in Hong Kong gained 0.13% on Friday. Monday will mark the resumption of trade on mainland China’s markets following the Lunar New Year break. The combination of data released on Thursday has bolstered investor optimism for a gentle landing — a scenario in which inflation eases against a backdrop of sluggish but resilient economic growth. Futures contracts are putting in a 94.7% chance of a 25-basis-point raise on the following Wednesday and envision the Fed’s overnight rate at 4.45% by next December, which is lower than the 5.1% rate Fed officials have projected for the coming year.
The personal consumption expenditures data for the United States, scheduled at 13:30 GMT, will provide fresh insight into inflation. “The disinflation impulse is likely to persist, as evidenced by recent CPI releases, further bolstering the case for a 25 basis point rate hike by the Fed next week,” said Saxo strategists. Additionally, the Bank of England and the European Central Bank will hold meetings next week that will reveal their expected monetary policy directions. After gaining over 2% on Thursday, the Hang Seng Index in Hong Kong gained 0.13% on Friday. Monday will mark the resumption of trade on mainland China’s markets following the Lunar New Year break. Tokyo’s core consumer prices, a leading predictor of national trends, increased 4.3% in January compared to the same month a year earlier, marking the biggest annual increase in over 42 years. The Japanese yen climbed 0.34 percent to 129.78 per dollar as the data bolstered market views that accelerating inflation could prompt the Bank of Japan to alter its ultra-easy monetary policy.
Robert Carnell, regional head of research for ING, stated that a policy shift is still a ways off. As wage increase is a necessity for sustainable inflation, the spring salary negotiations are crucial to track. The dollar index, which compares the U.S. currency to six other currencies, increased 0.12%, while the euro fell 0.11 percent to $1.0877. The last price for sterling was $1.2393, a decrease of 0.10% for the day. Oil prices increased in anticipation of an increase in demand from China’s reopening and following the release of solid U.S. data. U.S. West Texas Intermediate crude increased by 0.33% to $81.28 per barrel, while Brent crude increased by 0.33% to $87.75 per barrel.
»The pound remains unchanged as bleak data underscores recession fears«