IFX Market Report: Thursday 23rd February 2023

The UK's services sector witnessed a significant rebound in February, bolstering hopes that the country could evade recession in the first half of this year. The larger-than-expected surge in business activity, as per analysts, indicates that the UK would narrowly avoid a recession. However, the economic recovery could face a drag due to the squeeze on consumer spending from the energy crisis and a struggling manufacturing sector. The pound rose by more than half a cent on Tuesday, reaching $1.211, the highest as week high, as foreign exchange analysts anticipate a stronger economic growth that would increase the likelihood of further interest rate hikes by the Bank of England to curb inflation.

The latest purchasing manager's index, a critical measure of activity, shows that the UK economy is expanding at a decent pace, dispelling the possibility of contraction. While it may be too early to conclude that the UK will avoid a recession, it is not an implausible idea either. Public finance data also suggests that households and businesses are performing better than anticipated, with an increase in tax revenue, and the deficit may not be as high as forecasted by the Office for Budget Responsibility.

Meanwhile, minutes from the Federal Reserve's meeting earlier this month reveal that officials believed they needed to do more to combat rapid inflation and slow down the economy. The notes indicate that all participants continued to believe that interest rates needed to rise, and some considered that monetary policy might need to be even more restrictive due to easing conditions in financial markets in the preceding months.

Despite the Fed's official mandate to maintain stable prices, the institution alone cannot combat inflation, particularly given the pandemic-induced supply disruptions and the war in Ukraine. According to Adam Shapiro, an economist at the San Francisco Fed, 40% of inflation is supply-driven, 40% is demand-driven, and the other 20% is ambiguous. Therefore, while raising interest rates may reduce demand, it cannot increase supply, suggesting that the Fed alone cannot achieve the 2% inflation target.

In the Eurozone surprisingly strong services growth for Eurozone business activity which posted a 9 month high, pointed towards the possibility that the EU could escape recession.

Despite the positive Eurozone and UK news the Dollar has pulled back ground this week as the FED minutes and the potential for further rate rises. GBPUSD resides at 1.2030 whilst the Euros has fell back against the Pound and the dollar and rsides at 1.1360 (GBPEUR) and 1.0587 (EURUSD)

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