Yesterday at the Federal Reserve’s Semi-annual Monetary Policy Report Fed Chair Jerome Powell confirmed the FOMC terminal rate could be higher than initially anticipated (in Sept 2022 the TR stood at 4.6% for 2023, now the market believes the rate stands closer to 5%); Subsequent Dollar strength saw Pound plummet over 1.5% against the Dollar.
The Central Bank’s effort to restore price stability could mean borrowing costs will continue to climb for the foreseeable and policy makers are prepared to increase the pace of tightening, if required. A 50 bps hike in March seems highly probable.
Unsurprising therefore that the Dollar continues to gain strength against both Pound and Euro. Strong economic activity in January, namely NFP and retail sales bolstered Dollar strength, although this could also be largely down to weather and seasonal adjustment.
February saw GBP/USD fall by 2.45% following a sizeable retreat by investors who recognised that the Federal Reserve would need to maintain a hawkish stance. GBP/USD for the rest of March could see fresh four-month lows as many analysts predict Pound to sit at sub-1.20.
The Federal Reserve will continue to be data lead but the key events that could spike Dollar volatility include the IR decision on 22 March, US Payrolls on Friday and CPI data which comes out next Tuesday.
Today we have German Retail Sales YoY (JAN), which forecasting a 0.3% improvement from previous, but actually fell a further 0.5% to -6.9%. This IS not surprising as retail sales has been falling over the last couple of years.
In December last year retail sales had fallen 6.6% compared to the previous year and the German HDE Retail Association expects sales to fall by 3% in 2023.
Across the EU, GDP Growth Rate QoQ is expected to improve by 0.3%, while GDP YoY Rate 3rd Est (Q4) is expected to drop overall by 0.4% than compared to last year. An estimation of annual growth for 2022 stated a 3.5% increase in GDP; the first half of 2022 witnessed vigorous consumer spending, mainly on services following the easing of covid 19 containment measures. The forecast for 2023 should see 0.5% growth in the EU and 0.9% in the Euro area and steeper growth forecasts for next year at 1.6%.
There is also a speech by ECB President later in the morning which should give some indication to the ECB’s next IR decision. So far, we’ve seen 5 consecutive rates hikes since July last year.
On 2nd Feb the ECB raised rates by 50 BPS, following a weak but positive growth of 0.1% and inflation seemingly easing. Christine Lagarde subsequently indicated a 50 bps hike for March; if inflationary pressures continue then a 50 bps rise is almost certain and further hikes also likely.
ADP Employment Change (FEB) with a near double forecast of 200k compared to the previous 106K, indicating positive growth in the EU job market.
