Weekly Brief

Recession fears trouble markets

11 minute read

20 January 2023


It has been a fairly solid week for UK data and the pound, with GBP/USD moving within touching distance of the December high at 1.2447, before slipping back towards 1.2300 amidst a broader market decline (see USD). Sterling also marked some worthy gains against the likes of the EUR, CAD and JPY during that time, confirming a much stronger performance for the pound when measured against a broader basket of currencies.

This week’s key UK data releases have mostly helped to underpin the move, with inflation declining for the second month in a row, amidst headline inflation dipping to 10.6% (YoY). Core inflation slipped from 6.6 to 6.3% (YoY) through December. The latest UK unemployment report also highlighted ongoing robustness in the labour market, with the overall ILO unemployment rate remaining at a healthy 3.7%, news which will give the government some relief, given such a weak outlook for all things UK recently.

Although perhaps unexpected, given that the BoE have now raised their policy rate to 3.5%, UK house prices reported their first monthly fall in more than a year, dipping by 0.3% through November. Whilst that may represent the first such drop since late 2021, it helped to drag the overall annual growth rate down from 12.4 to 10.3%. Interestingly enough, London reported the weakest region-wide annual pace of house growth, at 6.3%, which does not bode well for the rest of the UK, which tends to lag London.

The latest Retail Sales for the UK have just been released this morning (Friday), and having declined by 0.4% in November, markets had expected a rebound through December, however, the latest figures highlighted an unexpected further decline of 1% (MoM/Dec), with a 5.8% drop over the past year, clearly reflecting the impact of those big increases to the cost of living for UK consumers.

Looking ahead, GBP/USD will need to break over 1.2450 to signal likely further upside gains, a move which may be dictated by broader dollar sentiment in the short-run, given the lack of keynote UK data releases scheduled for release next week.

Thoughts from the dealing desk

“With a week that’s seen higher than expected GDP, Labour Market and Inflation data, the market has all hopes on the Bank of England aggressively raising interest rates and supporting GBP. However, with disappointing retail sales data this morning and disagreements by the MPC as to the size of interest rate hikes, GBP could have room to fall before it rises.”

-Daniel Jones, Corporate FX Dealer


It has been another solid week for Euro area data. German Inflation softened (again) over the past month, slipping by 1.2% throughout December, a trend which is reflective throughout the region. The latest ZEW survey also highlighted that German investor sentiment has now turned positive for the first time since Russia’s invasion of Ukraine. The ZEW’s indicator of investors’ expectations over the coming six months, rose for the fourth month in a row from -23.3 to 16.9. Markets had been expecting a -15 print. That is some improvement.

With the trend of ever-improving data (against expectations) continuing throughout the region, there have been increasing concerns amongst investors that the ECB might be inclined to soften their language, and imply a shallower pace of hikes moving forward. However, that has certainly not been the case, with ECB President Christine Lagarde, speaking in snowy Davos, suggesting that the ECB will ‘stay the course’ with rate hikes. Whilst she did highlight that economic news has become more positive, and that Europe may now only see a small contraction, the fact that she remains resolute on hikes will give markets confidence, which could help to support the single currency moving forward. Lagarde has been backed by a splattering of ECB officials,  implying that the ECB will deliver further 50bps rate hikes over the coming months.

On that note, EUR/USD has remained airborne, without being able to break above 1.0875, which has marked the top for the pair on several occasions, although any dips have been met by worthy buyers. GBP/EUR has not fared as well, rallying back above 1.1450, backed by a resurgent pound (see GBP).  


Having adjusted over the past year to the climate of bad US economic data being good for markets, this week’s data releases have seen markets swing towards bad data being bad, given it increases the prospects of a US recession, as opposed to a more palatable slowdown or soft-landing. A sharp decline in the latest Retail Sales data, slipping by 1.1% during December, which is traditionally the most important month in the retailer’s calendar, coupled with a big decline in the latest NY Empire State Manufacturing data, with the index slipping from -11.2 to -32.9, started the rot. A 0.7% decline in Industrial Production added to the gloom, having been expected to have slipped by a more reasonable 0.1% throughout December, as manufacturing waned.

Further muddying the waters was the release of the latest Continuing Claims data a day later, which reflected less claims than had been predicted, some slightly softer Initial Jobless Claims as well as further evidence of ongoing weakness in the housing market, with both Building Permits and Housing starts missing estimates.

The combined news helped to put the brakes on the new year rally in risk assets, however, in truth the collective data releases are unlikely to make any big dents in the Fed’s rate decisions just yet. On that note, the latest batch of Fed-speak this week seems to see most Fed speakers agree with current market perception that the Fed will raise rates by (just) 25bps next month, with a further 25bps pencilled in for the following meeting. Beyond then it all gets a little more confusing, and we will need to see how incoming data looks like over the coming months, especially key inflation and labor data. Markets still expect the Fed to cut rates later this year. The Fed says otherwise.

As for the dollar, well the overall downtrend still persists, with the dollar index (DXY) moving to a new cycle low of 101.13 earlier in the week, aided by strong moves against the buck in both EUR/USD (see EUR) and USD/JPY, which slipped all the way down to 127.50 on anticipation that the BoJ might change their YCC policy, which as well all know by now, ultimately didn’t happen either.


Canada’s annual inflation rate declined more than expected through December, with headline inflation dropping to 6.3% (YoY) from 6.8% previously. Lower gas (petrol) prices were the defining contributor to the declines, which is perhaps not surprising given the trend of softening energy prices since the summer. Core inflation also declined, slipping from 5.8% to 5.4% (YoY).

The news on inflation helped to cement market perceptions that the BoC will raise Canadian rates by 0.25% next week, with markets now pricing in a near 80% probability of a 25bps outcome, a level which had already been increasing after the latest employment report reflected robust job growth through the past month.

Whilst markets may have a sense of confidence on the outlook for the BoC, the outlook for the Loonie has been far more challenging to predict. The broad trend of a weaker greenback has helped to drag USD/CAD towards the bottom of the 1.33 – 1.35 range regularly, but unlike most other major currencies, the Loonie has struggled to maintain any worthy gains beyond this. Saying that, the larger trend of Loonie strength still persists. Perhaps next week’s BoC meeting will encourage the Loonie to make a more meaningful break out of that range.


There was an unexpected decline in headline Australian employment over the past month, slipping by 14.6K, against an expected increase of around 22.5K. However, there was a much bigger than expected increase of 58.3k in the previous month, which may have been a factor. The overall unemployment rate remained at 3.5%, which is within a whisker of the all-time low, and reflects a robust labour market, given the job gains throughout the past year.

The latest inflation report is due next week, and given the surprising increase previously, markets will be somewhat anxious as to the outcome. Tentative forecasts suggest a decline in both the quarterly and yearly data. New Zealand inflation is also due out next week, with headline yearly gains expected to have declined from 7.2 to around 7%.

The big news out of New Zealand this week was the surprising resignation of Prime Minister, Jacinda Ardern, who said that she no longer has ‘enough in the tank’ to continue in the role. Despite achieving widespread domestic and global respect for their reaction to the pandemic, the Labour government have struggled in the polls of late.

Back to currencies, and having finally broken back over 0.7000 with some gusto since last summer, AUD/USD then promptly slipped back to under 0.6900. Saying that, the bigger trend of Aussie appreciation since the low of under 0.6200 still holds, so the Aussie bulls amongst us might remain somewhat optimistic. NZD/USD mirrored AUD/USD, rising above 0.6500, only to decline back under 0.6400 by the end of the week.


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