UK And Global Business Confidence Data Crucial For Pound Vs Euro, Dollar

21.02.23: UK and Global Business Confidence Data Crucial for Near-Term Sterling Moves against the Dollar and Euro

After very subdued market conditions on Monday due to the US market holiday, activity will bounce back on Tuesday.

The global economic outlook will be a key market element in the short term. In this context, the latest business confidence data will be released during the day with flash data from the Euro-Zone, UK and US.

The data will have implications for market confidence and policy expectations.

Consensus forecasts are for the indices to edge higher on the month, but only the Euro-Zone services sector is expected to be in expansion territory for February.

Within the data, evidence on inflation pressures will be important for expectations surrounding interest rates.

The relative outlook for major economies will also be important within the data with, for example, net Euro support if it appears that the Euro-Zone is out-performing the US.

Pound US Dollar Exchange Rate Outlook

The Pound was held in tight ranges on Monday as global activity was notably subdued.

The Pound to Dollar (GBP/USD) exchange rate held above the 1.2000 level and edged higher to near 1.2050 before drifting lower to near 1.2000 on Tuesday as the dollar secured a tentative net gain.

The Pound drew an element of support from hopes that a rebound in China would help support the global economy.

The latest government borrowing data recorded a January surplus of £5.4bn after a £25.6bn deficit for December, but this was substantially below the £12.5bn surplus for January 2022.

January is always a strong month due to corporate and personal tax receipts, but there were further huge energy-support payments for the month and debt interest payments also continued to increase.

Higher than expected borrowing will maintain concerns over UK fundamentals, but the latest PMI business confidence data will have a more substantial Pound impact.

There will be significant support if the services sector moves back into expansion territory while a sharper contraction would increase recession talk.

Overall, GBP/USD has scope for support below 1.2000 if there are no negative surprises in UK or global data.

Euro (EUR) Exchange Rates Today

There were no major Euro-Zone developments on Monday with narrow ranges prevailing in currency markets.

Gas prices retreated further on Monday with 17-month lows for the European futures contract. Lower gas prices will be a key element in protecting the Euro-Zone economy and also providing net Euro support.

The Euro-to-dollar (EUR/USD) exchange rate was unable to hold above the 1.0700 level and edged lower to 1.0670 on Tuesday.

Relatively tight ranges will prevail, but EUR/USD will have scope for a net advance if the Euro-Zone data is better than expected.

US Dollar (USD) Exchange Rates Outlook

There were no major developments on Monday with the US market holiday dampening activity.

Overall risk conditions remained important and the slightly less confident tone provided an element of dollar support in Asa on Tuesday.

There was also an element of caution ahead of the Federal Reserve minutes which will be released on Wednesday.

HSBC notes the important debate surrounding the US economy, Federal Reserve policy and the dollar.

According to the bank, evidence of strong employment gains will boost consumption and keep inflation elevated which will force the Fed to be more aggressive and undermine risk appetite.

This argument would tend to support the dollar.

The more positive assessment is that inflation and wages growth are decelerating which means that the Fed tightening is nearly done which will encourage a soft landing and underpin the global backdrop.

This scenario would tend to weaken the dollar.

According to HSBC this issue will not be resolved in the near term. It notes; “We believe this debate will continue over the near term, meaning that the USD is likely to remain choppy.”

It adds; “We also expect further deceleration in inflation and measured increases in the unemployment rate to decisively favour the ‘risk on’ narrative and USD weakness, as the year progresses.”

Other Currencies

Trading activity was limited on Monday with the US market holiday curbing activity and narrow ranges prevailed.

The Pound edged higher amid hopes for a recovery in China which would support global trade volumes, although overall moves were relatively limited.

The Pound to Swiss franc (GBP/CHF) exchange rate managed to crawl just above the 1.1100 level during the day.

The Pound to Yen (GBP/JPY) exchange rate edged higher to near 161.70.

The Pound to Australian dollar (GBP/AUD) exchange rate recovered from 1-week lows around 1.7400 and traded just above 1.7450 on Tuesday.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also recovered from 1.9220 to trade around 1.9290.

The Day Ahead

The latest Canadian consumer prices data will be released on Tuesday.

Consensus forecasts are for the headline inflation rate to decline to 6.1% from 6.3% with the core rate edging higher to 5.5% from 5.4%.

The data will have significant implications for Bank of Canada rate expectations with the Canadian dollar losing ground if the data is weaker than expected.

Overnight, the Reserve Bank of New Zealand (RBNZ) will announce its latest interest rate decision. Consensus forecasts are for a further increase of 50 basis points to 4.75%.

Overall risk trends will be important for currency markets.

Developments in Ukraine will need to be monitored closely with the anniversary of Russia’s invasion at the end of this week.