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Markets’ vulnerability to US interest rate revisions remains

We saw a sell-off in the GBP and EUR against the USD towards the end of last week, prompted by some robust US data, which in turn increased US yields and short-term interest rate hike expectations from the Federal Reserve. For the likes of the euro, pound and yen, this week might be little different versus recent ones. Any recoveries we see at the beginning of the week are likely to end up being given back towards the close of the week, as the momentum from any positive news fades, in my view. 

If we look at how the markets have traded in recent weeks, the efforts to build on previous gains have been repeatedly rebuffed, such that GBPUSD has dipped below $1.20 on several occasions, EURUSD has traded at its lowest level since early January, USDJPY has risen to its highest level since pre-Christmas and USDCNY is at its highest level since the turn of the year. Is this the beginning of a much more sizeable USD rally, and could January prove to be the USD’s weakest point for not only this quarter, but the quarters to come? I’m not convinced there is much news out there that can turn the tide consistently for the likes of the GBP, EUR or JPY if the Federal Reserve continues to increase interest rates. 

Data and surveys to point to further improvement, but it all looks a bit anaemic; the focus is instead on politics

This week’s data and survey release calendar looks on the surface to be sizeable, but in terms of the potential to shift market sentiment, there are relatively few noteworthy releases. Euroland M3 money supply figures already released for January, and sentiment indicators for February, undershot expectations. The latter of which was a surprise, given signs of strength seen in individual nations in recent weeks. Euroland probably has the most important releases due, with provisional February consumer prices from France, Germany, Italy and the Euroland aggregate due later in the week. UK consumer lending and M4 money supply figures are due for January, and combined with house price data for February, could point to additional economic weakness. As for the US, February consumer confidence and PMIs (Purchasing Managers' Index) / ISMs (Institute for Supply Management) manufacturing and services will alter the picture only a little, as far as short-term Federal Reserve decisions on monetary policy are concerned. 

Aside from macroeconomics, a lot of attention is likely to be on politics this week, with the UK government and EU Commission looking to seal a deal on changes to the Northern Ireland Protocol. Should the deal win the backing of Northern Ireland politicians and government backbenchers, that could offer some short-term support to the GBP, but I doubt this is a major obstacle in terms of the UK’s short term economic prospects. 

Turkish central bank cuts only 50 basis points as fears over currency weakness remain

The central bank of Turkey was expected to cut interest rates by a full percentage point last week, but instead chose to cut by only 50 basis points, perhaps because of the pressure that continues to be exerted on the Turkish lira. While this offers few clues as to the thinking of other central banks per se, I think it does indicate that central banks continue to keep one eye on what’s happening with the US Federal Reserve, and how opinions are changing amongst its voting members. Currency weakness is not just of concern to emerging market central banks, but to major economies’ central banks as well, in my view. 

Could we see more central banks needing to alter their strategies because of the prospect of a higher US interest rate peak, and what sort of damage will this do to 2023 growth prospects?

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