IFX Market Report: Wednesday 5th April 2023

Businesses in the UK performed slightly more strongly than originally thought towards the end of 2022, which has boosted orders, confidence, hiring and investment intentions in March. The uplift comes as the UK looks likely to avoid a recession, which was somewhat a different story 6 months ago.

There have been mixed views from the Bank of England this week as Silvana Tenreyro, a member of the MPC, said there were signs inflation would fall “well below” the central bank’s 2% target rate after a sharp decline in global energy prices, therefore interest rates may need to be pulled back sharper and more quickly than expected.

However The Bank of England's Chief Economist Huw Pill warned it could still be too soon for the Bank of England to pause its interest rate hiking cycle. Pill also pointed out that rate cuts by the end of 2023 were not guaranteed as, inflationary pressures weigh on any decision they would make. He also confirmed that all decisions in regards to rate hikes will be based on incoming data from the middle of each month in relation to the labour market and inflation.

Inflation in the Eurozone has been falling sharply as March’s figure showed a drop to 6.8% from 8.5% the previous month and way below the 10.6% peak in October 2022. Despite this policymakers are still cautious as the fall is predominately down to a fall in energy prices recently, but food prices are on the rise.

Recent issues in the US banking sector have left some analysts believing that there is a much bigger underlying problem facing the US. Veteran researcher Luke Gromen he heads up a financial research firm has said Jerome Powell has only "terrible" options to choose from, as the Federal Reserve chair weighs the threat of historic inflation against the risk of a financial and economic disaster. "It's not a banking system problem," he said. "It's a US Treasury G7 sovereign debt, balance of payments problem." "Treasuries underpin everything, It's the collateral for the whole system. So if we're going to have a Treasury problem, we're going to have an everything problem’’.

GBPUSD rose to a 10 month high 1.2520 today after recent positive UK data and uncertainty in the US. GBPEUR has also pushed higher moving over the 1.14 mark.

Some interesting news to keep a close eye on is the recent increase in the of the Currency swaps with the Chinese Yuan, particularly in Russia and Latin America with Argentina leading the way. The countries involved believe by countering the dominance of the US Dollar that they rely on as a global way of moving money, they can avoid shocks that arise from the US tightening financial policies whilst promoting their own industrial development.

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