IFX Market Report: Friday 2nd June 2023

The possibility of the Bank of England implementing additional increases in interest rates has resurfaced following the release of inflation data last week. The figures revealed a disappointing progress in relation to the BOE's goal of 2% inflation. Market expectations suggest that interest rates could reach a peak of 5.50%, but according to median forecasts from May, they are anticipated to reach a maximum of 5.00% by the end of the third quarter.

British manufacturers have expressed concerns over falling exports for the 16th consecutive month, attributing the decline to post-Brexit trade obstacles with European firms. The manufacturing sector has contracted for the 10th month in a row, primarily due to continuous decreases in exports. This information comes from the S&P Global/CIPS purchasing managers index (PMI).

The IoD Directors' Economic Confidence Index, which measures the optimism of business leaders regarding the UK economy, remained stable at -6 in May 2023. This value shows little change compared to the previous month's score of -5. The index had gradually improved over the past five months, climbing from a low of -64 in November 2022.

Nationwide reported a significant decline in house prices, stating that they dropped by 3.4% in the year leading up to May, marking the largest decrease since July 2009. The report also warned that further increases in mortgage interest rates could negatively impact the housing market. In May alone, house prices experienced a slight decline of 0.1%, with the average property price now standing at £260,736. On average, prices are still 4% below their peak in August 2022.

In the eurozone, inflation eased more than anticipated in May. Flash figures revealed that the bloc's annual headline inflation rate dropped to 6.1% from 7% in April, reaching its lowest level since Russia's invasion of Ukraine. Core inflation, which excludes energy and food, also fell more than expected, declining to 5.3% from 5.6%.

A report from the Federal Reserve indicated a stall in U.S. economic activity in recent weeks. Job growth and inflation have both slowed, and the outlook for business prospects in the near term has slightly worsened compared to previous assessments. The Federal Reserve's latest "Beige Book" stated that while there were expectations for future growth, they had deteriorated slightly.

The Pound to Dollar exchange rate (GBPUSD) has shown a steady appreciation over the course of the week, with a significant uptick observed on Thursday. This increase was attributed to reduced expectations for a June interest rate hike by the U.S. Federal Reserve. GBPUSD started the week trading as low as 1.2334 but has since rallied as high as 1.2539.

The Euro weakened on the back of their inflation figures retreating thus meaning less chance of significant interest rate hikes. GBPEUR reached 1.1639 the highest the pair have been since December 2022, whilst EURUSD resides at 1.0764, however it did fall to 1.0639 on Wednesday which is the lowest the pair have been since March this year.

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