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Currency Market Update - 29th March 2023

Currency Market UpdateUK- BOE Gov. Bailey Speech – On Monday, at the London School of Economics the Governor gave clear hints that interest rates may have to go higher in order to lower consumer prices, and this will take front seat priority for the BoE compared to the recent banking turmoil.

The concerns that arose from the banking scare could lead many lenders to adopt a more risk-averse attitude in lending. This would add further squeeze to liquidity. If inflationary pressures persist then more rate hikes are likely but policy makers don’t see a threat to UK financial stability as it believes that UK banks are more resilient with robust capitol positions.

It was fairly conclusive from his remark that further monetary tightening would be required if it becomes evident that inflation pressures are persistent.

Food Price Inflation is sticky and are at record levels according to the BRC- shoppers are paying 15% more for the same goods compared to 12 months ago and fresh food inflation has accelerated to 17%.
The positive from this is that Pound has made fresh gains following expectations that another rate hike is more likely in May, and any pause on rate hikes not due before mid-summer.

Any further strength in Pound should help bring prices down and also make imports more affordable, which should in turn drive down prices- unlike the last 12 months where scorching prices and pound weakness made imports more expensive. Even though the Pound is 16% up against the Dollar since last September’s mini-budget fiasco, it’s still 12% lower than June 2021.

USA- Goods Trade Balance Adv (FEB) - The deficit widened in February by 0.6% to 91.6B due to lower exports- (the all-time high export figure was 2.62B recorded in August 2022)

ECB- President Lagarde Speech- Christine Lagarde’s most recent speech confirmed that growth projections for the trading block has been revised to 1% for 2023 and 1.6% for both 2024 and 2025, but these projections were made prior to recent financial market tensions therefore ‘these tensions imply additional uncertainty around the baseline assessment of inflation and growth’.

USA- CB Consumer Confidence (MARCH) - A far more positive reading of 104.2 against a forecast of 101 was released. The upturn in consumer confidence comes 6 months ahead of expected time frame. The survey released 10 days after the closure of the SVB, and with depositors’ fund assured by the Central Bank and with no further bank closures reported consumer confidence in strong. According to Chris Rupkey of FwdBonds – ‘consumers have not lost confidence and expect better days lie ahead’. Furthermore, Fed officials backed away from a more aggressive action on rates…….tighter credit conditions following the banking panic could slow down economic growth in the future’.

Today we have data releases that include:

GERMANY- GfK Consumer Confidence (APR)- Forecast-29.2 / previous -30.5
Consumer confidence was forecast to rise by just over a percent and came in 0.3% better than forecast it’s still firmly rooted in negative territory.
What is positive is that last month saw the highest reading since July 2022, which was a fifth consecutive rise in sentiment amid falling energy prices and the hope that a recession would be avoidable. A significant improvement was seen across income expectations and economic conditions, despite the uncertainty to buy amongst consumers.

UK- Mortgage Approvals (FEB)- Forecast 40.5K / Previous 39.637
January saw net approvals for house purchases decrease for the fifth consecutive month and was the lowest since the start of the global pandemic and the weakest since January 2009.
The compound cause of a drop in housing demand is owed to rising borrowing costs, stubbornly high inflation and a looming economic recession, so despite a slightly improved forecast not much has change economically and this is reflected in recent predictions that the housing market will drop 10+% in 2023.

UK- Mortgage Lending (FEB)- Forecast: £2.4B / Previous £2.541B
In the last few months we’ve seen a significant increase in lender risk aversion; YoY UK interest rate has moved from 0.75% last March to 4.25% at present, which is an 11th consecutive rise, totalling 3.5% increase in the last 12 months. Unsurprisingly therefore that mortgage lending is on a downward trajectory, this is clearly reflected across fewer mortgage products on the market, a more stringent affordability assessment across the board by lenders and much lower LTV lending.

USA- MBA – 30 Year Mortgage Rate (MAR/24)- Previous: 3%
USA- MBA Mortgage Applications (MAR/24)
No forecast provided but most recent data has suggested that both mortgage rates and applications have been dropping- January saw mortgage rates drop 19 basis points to 6.23% due to inflation seemingly peaked and treasury yields dropping.
And applications also dropped, to a 28 year low to 5.7% as rising rates deterred a lot of home-buyers.

Other significant data out later in the week includes:
German Inflation data + Retail Sales + Unemployment data
USA + UK GDP data
ECB Core Inflation data
US Core PCE Price Index



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