Busy week ahead in the economic calendar, markets await fresh impetus
Rising costs and consumer woes hit business optimism, despite flatline UK GDP for Q4 2022. We also look ahead to a busy week on the economic calendar, with a handful of key risk events in the limelight.
Even though the UK avoided recession at the end of last year, businesses remain pessimistic as they cut back on staff as their output falls. The latest Business Trends Report from BDO, the accountancy and business advisory group, has found that optimism stagnated at the start of this year.
For the third time in just six months, all four of the Indices tracked by the report - Output, Optimism, Employment and Inflation – fell simultaneously (BDO, 2023).
The BDOs poll, which covers over 4,000 companies, identified a sharp decline in growth last month. It’s Output Index which tracks economic growth, also fell for the fourth month running. It lost 3.45 points to 89.15, remaining well below the crucial 95-point showing stagnation.
The drop in output was driven by falling consumer demand across the services sector, as shoppers cut back amidst the cost of living crisis and rising energy prices.
The Week Ahead
As the latest consumer price index (CPI) readings for the US and the UK are to be released on Tuesday and Wednesday, rising prices are expected to once again make headlines this week.
Tuesday - US CPI (January): After reaching a peak of 9.1% in June, the CPI reading slowed to 6.5% in December. Jerome Powell, Fed President, insists that there is still a "far way to go" in the "disinflationary process" and that higher interest rates may be necessary to control inflation.
The Federal Reserve increased its benchmark rate on February 1 by 25bps to 4.5-4.75%. The CPI numbers for January may help establish how many additional rate increases might occur given that markets are already pricing in an additional quarter-point increase in March.
Tuesday – EU GDP. The Eurozone is to release revised GDP data tomorrow. Moreover, European Central Bank President Christine Lagarde is due to testify on the bank's annual report before the European Parliament in Strasbourg on Wednesday. Ultimately, investors and market participants will closely scrutinize the aforementioned data to pick clues on the EU's economic situation.
Wednesday - UK CPI (January): In its most recent effort to lower inflation, which is currently running at 10.5%, the Bank of England this month boosted the base rate by half a percentage point to 4%. The BoE also made it clear that more rate increases would only be necessary if inflationary pressures remained high. If CPI doesn't soon fall under 10%, we might anticipate a quarter-point rate increase in March.
Wednesday - Retail Sales (US): The US are set to publish their retail sales print for February 2023 on Wednesday afternoon. A stronger reading would be beneficial for the USD, which is the current forecast as it is expected to increase from -1.1% in January to 1.6% for February.
Friday – Retail Sales (UK): The UK is expecting a slight improvement on their Retail Sales data for February, however the reading is still widely expected to be relatively underwhelming; with the forecast print reading at -5.5% compared to -5.8% for January.
All of the above risk events are likely to create volatility in the FX markets. GBP has held steady as we enter the new week versus the EUR and USD however investors await fresh impetus from the economic events before distinguishing what new levels are possible.
The EUR had a relatively underwhelming previous week, however could be granted a boost following the GBP figures on Tuesday.
The USD will await speeches from 5 FOMC members this week along with the heavy data load due to be released. Market sentiment is currently deemed ‘risk off’ which is usually in line with a strong dollar – and is one of the reasons why GBP/USD is back down and 1.2050 and EUR/USD sits at 3 week lows of 1.0655.
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