Daily FX Update: Dollar slips further as risk appetite returns – Silicon Valley Bank

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Source: Bloomberg
The UK government sank deeper into debt in December as rising debt-interest payments and the cost of insulating consumers and businesses from the energy-price shock strained the public finances. The deficit now sits at £27.4 billion, almost triple the shortfall a year prior. Double-digit increases in receipts from VAT and income tax helped to partially offset a surge in interest costs – ¼ of government debt is linked to inflation.
Strikes in the UK are becoming more widespread, and while a long way from the scale seen in the 1970s, could be enough to tip the rounding on the headline GDP figures. Rishi Sunak is insisting the government had been “reasonable” in its public-sector pay offers yet the country’s unions, representing workers from a wide range of public-facing professions, conclude that they have no choice but to undertake industrial action as their calls for improved pay and working conditions go unanswered.
Flash PMI’s for the UK are expected to show a dip to 48.8 from 49.
Sterling was mixed yesterday reaching highs of 1.2448 before retreating to just above 1.2320 before London close. GBPUSD sits in the 1.24 region as we print. The FTSE has gained 0.18% since the London open.
Hawkish rhetoric continued from the ECB yesterday, with policymaker Kazimir echoing recent comments that despite easing inflation, the pace of rate hikes needs to continue with “two more hikes by 50bps” needed.  EURUSD hit a 9-month high on the comments to trade at 1.0919.  President Christine Lagarde is due to make further comments today ahead of next week’s policy decision.
The Euro has erased its gains against the dollar this morning following disappointing German PMI data. The manufacturing index failed to meet expectations, printing its seventh consecutive month of contraction. The single currency slipped 0.25% on the release, despite services and composite indexes ticking slightly higher, as markets await the Euro Area release and the first glimpse of the state of the economy this year.
As we have now entered the blackout period ahead of the FOMC meeting next week, markets are heavily pricing a downshift to 0.25% hikes starting in February.  The Fed’s terminal rate is seen peaking just shy of 5%.
A return of risk appetite in 2023 is driving the dollar’s decline, with the greenback losing 2.4% over the last month, and continues a longer more significant trend of reversal since October 2022.
Ten-year Treasury yields have declined more than 0.8% from early November to mid-January. This is likely attributed to market expectations of a less hawkish Fed and the risk of recession. As the Fed ends it tightening cycle the burden of controlling elevated inflation falls on hope for favourable supply shocks.
A fast reopening has elevated China’s growth expectations, along with supportive policies from central and local government. Growth forecasts have improved to 5.8% in 2023 from 3% in 2022. Meanwhile, Joe Biden has confronted China with evidence that Chinese companies have sold non-lethal equipment to Russia for use. The support stops short of the more robust military aid that Russia has asked for.
Japan’s slightly stronger services PMI of 52.4 helped lift the composite PMI back into expansionary territory in January. The Index rose from 50.8 to 49.7
A voting member of the Bank of Israel’s committee has stepped down, saying the country is in danger. Moshe Hazan who has been on the panel for more than five-years, was very critical of plans by Netanyahu’s government to overhaul the judiciary system. Following dollar weakness, USDILS has slipped lower into the 3.36 range.
Euro-Area PMIs
UK Jan. PMIs
US Jan. PMIs
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