IFX Market Report: Tuesday 31st January 2023

The IMF have predicted that the UK economy will be the only major economy to shrink in 2023, which includes Russia in this category. They believe that the UK will see 0.6% contraction, rather than grow slightly as previously thought. Despite this the IMF have said that the UK is now on the right track and the UK out performed many forecasts last year, they have also revised 2024 forecasts up to 0.9% from 0.6%.

Analysts believe that Brexit is causing the UK economy to be 4% smaller and costing the country £100bn per year, fuelled by companies struggling to attract investment and hire workers. However, cutting ties with the EU has allowed Britain to create freeports to spur trade and reform financial services rules to the benefit of banks in the City of London so the long term effects of Brexit could be somewhat different.

The US economy has showed resilience in Q4 of 2023 posting an annualised GDP rate of 2.9% compared to 2.6% estimated. The year overall was split in half with Q1 and Q2 posting contraction, and the second half of the year showing growth. Fed chairman Jerome Powell has stated that the economy has not yet felt the full effects of the rate tightening cycle. This means that the pressure from higher borrowing costs is likely to start hitting businesses and consumers, which will surely put the brakes on growth.

Data on Monday showed that the German economy unexpectedly shrank 0.2% in Q4 of 2022. Analysts had predicted a flat number of 0%, so the contracted number posted points to a much predicted recession, although not as deep as initially feared.

EURUSD fell this morning briefly dropping to 1.0790, down from its recent 10 month high of 1.0910. The dollar also pulled back against the pound as traders pushed back into the safe haven of the dollar.

Wednesday and Thursday are the main days for major data this week with US manufacturing PMI numbers as well as the FEDS interest rate decision on the agenda for Wednesday. Forecasts are that the FED will hike rates by 0.25% bringing the overall base rate to 4.75%. This is followed by the BOE interest rate decision on Thursday where policymakers are expected to hike rates by 0.5% bringing the base rate to 4%.

GBPUSD resides at 1.2313

GBPEUR resides at 1.1375

EURUSD resides at 1.0821

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