Who will blink first?

By Lauren Buckner

Currency markets are experiencing a rather muted start to the New Year, some welcome relief perhaps following the volatility of 2022! This has been comforting for Sterling while its decline in value since early December has been halted, for now. The continued outlook for the UK economy and Sterling is that this year will be challenging but we do appear to have found some support at recent levels with the Euro and US Dollar which could be a nice buying opportunity for those converting from Pounds.

With economic outlook at the forefront of everyone’s minds, the Pound was little impacted by Prime Minister Sunak’s speech yesterday. Pledging to halve inflation over the next 12 months (a move already predicted by analysts with the cost of fuel falling) and to grow the UK economy before the next general election (expected January 2025) markets failed to react. With the Office for Budget Responsibilty predicting a 1.4pc contraction in the UK economy in 2023 he is seemingly confident that the UK will recover strongly from any recession, and who wouldn’t agree with a politician?

Rather unsettling however was the release around the cost of food, fresh produce specifically, in December. For the UK costs rose to their highest levels since 2005 (when records began) increasing by an eye watering 15pc raising continued concerns around the continued rise in the  cost of living. The increase in prices does not appear to have dampened Christmas spending with retailers reporting a surprising 11pc increase in sales however retailers do not expect this trend to continue through January and beyond. Inflation has become a real monster in the UK and is driving the current economic slump, the UK is particularly vulnerable to rising global costs as we import more than we export – the reason many believe that the recession here will take a firmer grip than in the EU. For comparison, inflation in France yesterday was released at 5.9pc, for the UK it currently sits in double digits.

Higher inflation globally has of course led to focus on monetary policy as central banks start to increase interest rates in an attempt to curb rampant inflation levels. It has been predicted that the rise in interest rates will begin to slow as inflation levels start to drop however, last nights minutes from the recent Federal Reserve meeting in the US suggest that this may be a premature expectation. Citing a cautious approach to easing monetary policy too soon the FED highlighted their belief that price rises will take a prolonged period of time to slow and reduce to more acceptable levels.

The US economy continues to perform well with Q4 GDP predictions sitting at a solid 3.9pc which is driving a strong USD. With inflation running around a 40 year high it is predicted that the US economy will enter recession this year. For now, the employment market in particular remains buoyant with recent data suggesting twice as many workers in the US are available in comparison to job posts and non-farm payrolls running higher that expected throughout 2022. This Friday’s release will provide further insight here. We will also receive inflation and retail sales data for Europe at the end of the week, giving the single currency its first chance to influence exchange rates in 2023.

As economic uncertainty continues currency markets will be poised to react as data is released – do not expect these quiet markets to last for long. Please get in touch with us to discuss your upcoming requirements.