IFX Market Report: Tuesday 16th May 2023

This morning, the jobs data in the UK presented a mixed picture. On one hand, wages showed an acceleration, reaching 6.7% (excluding bonuses). On the other hand, the unemployment rate slightly increased, although there was a decrease in inactivity. The Bank of England is likely to be concerned about the pace of wage growth, as it does not align with the goal of inflation returning to 2%. However, there are indications of emerging slack in the labor market, which is encouraging.

The pound dropped across the board initially to around 1.2460 against the dollar and 1.1470 against the Euro, however those gains were short-lived and the pound returned to 1.2530 and 1.1505 respectively. EURUSD currently resides at 1.0895

The governor of the Bank of England, in an interview with Sky news expressed his expectation that inflation will decline rapidly within a matter of weeks. However, he cautioned that a significant portion of the impact from interest rate hikes is yet to be felt. Andrew Bailey made these remarks following the record-breaking 12th consecutive increase in interest rates, raising the borrowing costs to 4.5% earlier on Thursday.

The Bank of England has revised its previous outlook on the UK economy, changing its stance from predicting a recession in 2023. In their latest report in May, the bank now anticipates a more favourable outcome, with a soft landing expected despite the challenges of high inflation and a series of interest rate hikes. One contributing factor to this shift is the projected increase in global demand for goods and services. The central bank's updated forecast indicates a modest GDP growth of 0.25% in 2023, in contrast to the previous prediction of a 0.5% contraction as stated in the earlier report. Furthermore, the bank foresees a growth rate of 0.75% for both 2024 and 2025

According to the European Commission, the economy of Europe is anticipated to experience faster growth than previously anticipated in the coming years, even in the face of high inflation and increasing interest rates. As per the commission's latest projections, the European Union's 27 members are expected to achieve an average growth rate of 1% in 2023, which is an upward adjustment from the previous estimate of 0.8%. Additionally, the forecast for growth in 2024 has been revised to 1.7% from the previous projection of 1.6%.

U.S. Treasury Secretary Janet Yellen is expected to convey that the ongoing impasse regarding the federal debt limit is already having severe repercussions on the American economy. These consequences include an increase in borrowing costs and the exacerbation of the nation's debt burden. Yellen will address a gathering of community bankers in Washington and will remind them of the previous "eleventh-hour brinkmanship" over the debt ceiling in 2011, which resulted in the first-ever downgrade of the U.S. credit rating.

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