January 4, 2023

“The US dollar’s impressive rally across the board came into a consolidation phase in the early Asian trading session before losing ground in the European session. EURUSD is recovering after touching its lowest level since December 13 yesterday, supported by ECB’s hawkish tone and falling US Treasury Yields. All eyes are on US ISM Manufacturing PMI and Fed Minutes later today.”

Sam Cornford, Partner – Head of Trading

 

Main Headlines

Republican Kevin McCarthy yesterday to remain in the race to be the powerful US House of Representatives speaker, hours after hardline members of his party repeatedly blocked his bid to lead their brand-new majority. In the first day of what could prove to be a brutal showdown between about 20 hardliners and the other 202 members of the Republican caucus, McCarthy failed in three ballots to achieve the 218 votes needed to become speaker, a role second in line to the Oval Office after the vice president. McCarthy told reporters that former President Donald Trump had called him and reiterated his support. Trump has backed McCarthy in the race and remains a powerful figure in the Republican Party.

The UK chancellor, Jeremy Hunt, is expected to meet with business groups at lunchtime to discuss the government’s energy support after March. Business leaders fear the government will halve its help with energy bills. The Federation of Small Businesses, UK Hospitality, the CBI and the British Chambers of Commerce are all expected to attend the meeting. Unlike households, businesses are not covered in normal times by an energy price cap, which limits the amount suppliers can charge per unit of energy. The details of the support businesses will receive towards their energy costs are expected to be announced next week.

 

GBP

Sterling is well bid against most major currencies this morning. UK food price rises soared to a record rate in December, figures show, as retail industry bosses warned that high inflation would continue in 2023 amid the fallout from surging energy bills. Annual food inflation jumped to 13.3% in December, up from 12.4% in November, according to the latest monthly report from trade body the British Retail Consortium (BRC) and the data firm Nielsen. The BRC said this was the highest monthly rate since it began collecting data in 2005. Highlighting the pressure on households during the festive shopping season, the industry snapshot showed the price of many essential foods rose sharply as the reverberations from Russia’s war in Ukraine continued to drive up energy costs.

 

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Most European Union countries favour introducing pre-departure COVID testing for travellers from China, the European Commission said yesterday, as Beijing plans to lift travel restrictions on its citizens despite a wave of COVID infections. The common EU approach emerged after a meeting yesterday of the Health Security Committee, an EU advisory body of national health experts from the EU-s 27 countries and chaired by the Commission. The Commission prepared a draft proposal for the talks, which included a recommendation for mask wearing on flights from China, wastewater monitoring for aircraft arriving from China, genomic surveillance at airports and increased monitoring and sequencing and increased EU vigilance on testing and vaccination.

 

USD

The dollar is weaker than most major currencies in the early morning trade. The Federal Reserve is set to shed more light on why it is worried that strong inflation may linger as the US economy moves into the new year. At the conclusion of the Dec 13-14 meeting of the Federal Open Market Committee, policymakers published new projections showing they expected inflation would end 2023 higher than they previously thought. That led to surprisingly widespread support in the projections for the notion that interest rates would need to rise above 5% in 2023. Officials saw inflation ending 2023 around 3.1%, according to their median projection, compared with 2.8% in the previous quarterly forecast released in September. The Fed will publish minutes of the meeting today.

 

Markets

European markets climbed this morning, with investors looking ahead to the release of more US economic data, plus the latest minutes from the US Federal Reserve’s most recent policy meeting. Global markets will be looking for insight into the central bank’s thought process when it comes to interest rates and the state of health of the US economy. The pan-European Stoxx 600 was up 0.8% in early trade, with insurance stocks adding 1.8% while oil and gas stocks fell 2%. US Stocks closed lower yesterday, giving up earlier gains, as concerns such as rising rates and high inflation that knocked the market down last year continued to trouble investors in the new year. The S&P 500 fell 0.40%. The Dow Jones Industrial Average ended the day down 10.88 points, or 0.03%.

 

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany Nov. Import Price Index
8:00 a.m.: Romania Nov. PPI
8:30 a.m.: Sweden Dec. Swedbank/Silf Composite, Services PMIs
8:30 a.m.: Switzerland Dec. CPI
8:45 a.m.: France Dec. CPI
9:15 a.m.: Spain Dec. S&P Global Composite, Services PMIs
9:45 a.m.: Italy Dec. S&P Global Composite, Services PMIs
9:50 a.m.: France Dec. S&P Global Composite, Services PMIs
9:55 a.m.: Germany Dec. S&P Global Composite, Services PMIs
10:00 a.m.: Euro-area Dec. S&P Global Composite, Services PMIs
10:30 a.m.: UK Nov. Mortgage Approvals, M4
11:30 a.m.: Germany to sell bonds
12:00 p.m.: EU to sell bills
2:00 p.m.: Hungary central bank minutes
8:00 p.m.: FOMC minutes
Poland base rate announcement

 

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