EM Market Report

EUR rebounds higher

Thanim Islam
Thanim Islam 23 January 2023

- ECB Knot pushes for two more 0.50% hikes

- Historical hawk Fed Waller turns dovish

- First gauge of 2023 economic activity due this week

Over the weekend

  • Fed member Waller, historically a hawk, put out a dovish statement on Friday, suggesting that he thinks that Fed policy is sufficiently restrictive, and backed calls for a 0.25% rate hike in February. As a result stocks gained into the Friday close, and we saw USD close weaker as well.
  • That USD weakness has continued this morning with EURUSD making a new 9-month high, and GBPUSD hitting December highs.
  • The gains on EURUSD were also aided after ECB’s Knot said on Sunday that he backs a 0.50% rate hike in February and March. So far so good for the ECB, in terms of pushing back against the report last week that the Bank was considering slowing down its pace of hikes. GBPEUR has weakened off last weeks highs as well.

Today

Market rates

* Daily move - against G10 rates at 08:00am, 23.01.23

** Indicative rates - interbank rates at 08:00am, 23.01.23

Table-1

Data points

Table (1)-3

Speeches

  • EUR – ECB Visco, Panetta, Holzmann, and Lagarde

Our thoughts

The EUR is the out-performer so far this morning, following the comments from ECB Knot this weekend causing GBPEUR to retreat off last weeks highs, and EURUSD to make a new nine-month high.

We are now in the Fed blackout period ahead of the Feds meeting on the 1st February 2023. But with focus slowly starting to turn to one of focusing on growth, US GDP for the fourth quarter will be in focus on Thursday. Expectations are for growth to have slowed from 3.2% to 2.7%.

Before that we have services and manufacturing PMIs from the UK, EU, and the US on Tuesday, all of which will give us an early gauge of expected activity for this month.

Chart of the day

Peak ECB rate policy surged higher in December to 3.5%, following the hawkish ECB meeting. Last week's report of slower hikes by the ECB shaved 0.25% off the terminal rate, but we can see, since expectations have risen higher again, there's evidence that the hawkish ECB members did a job on averting lower rate expectations.

As a result, the EUR is staging a bit of a recovery. EUR moves going forward will likely continue to be dictated by ECB rate policy. Currently markets expect a 0.50% hike in February and 66% chance in March.

23012023 cotdSource: Bloomberg Finance L.P.

Have a great day.