As markets opened this morning, the start of 2023 has been marked by immediate volatility. The EUR and GBP both saw significant drops against the Dollar, with the EUR experiencing its largest one-day fall since September and the Dollar reaching a two-week high. This profit-taking was expected after the EUR had gained 12% against the Dollar in the fourth quarter of last year. Currently, interest rates favour the Dollar, but as the Federal Reserve starts to taper and the European Central Bank increases rates, there may be a shift towards a positive outlook on the EUR.
Contrary to expectations, the energy crisis has not materialized due to a warmer-than-expected winter and reduced consumer energy consumption. Inflation in Germany also decreased in December. The Eurozone inflation data, set to be released on Friday, is predicted to drop from 10.1% to 9.6%. These factors contribute to the current negative sentiment towards the EUR, but it is unlikely to affect the ECB’s plans to hike in the first quarter to curb inflation.
The GBP faced further challenges as it broke the psychological barrier of 1.20 at market opening. Sterling has swung 20% from its September low of 1.03 to 1.24 in December, due in part to the negative impact of the “mini-budget”. Investors will be cautious, given the forecast for the UK to experience the worst recession of the G7. On Friday, UK investors will watch the Halifax House Price Index for signs of weakness, while Bloomberg analysts predict a 10% decline in UK house prices for 2023.
Follow us for more updates, and always if you need help with FX and money solutions, reach out to Forward FX Ltd today.