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Jamie Jemmeson
February 9, 2022

Bank of England Chief Economist Speech to be Deciphered for Clues on Future Policy

UK Retail Sale Post Positive Reading. Can This Continue?

It was a quiet day for the UK yesterday with no major data released. Sterling made limited gains against both the US Dollar and Single Currency but in large remained in tight ranges.

Yesterday we saw some slightly dovish comments about monetary policy from European Central Bank (ECB) and Federal Open Market Committee (FOMC) members; will the BoE echo the same sentiment to cool expectations? BoE Chief Economist Huw Pill is scheduled to speak on ‘The UK Monetary Policy Outlook’ at the Society of Professional Economists. Pill voted in favour of a 25-basis point rate rise to 0.5%. With inflation continuing to soar, elements of the market are pricing in circa 150bp of hikes to 1.75% in total for this year. Goldman Sachs believe we could see back-to-back hikes up to May, taking interest rates up to 1.00%. With Pill being the Central Banks’s Chief Economist, it will be interesting to hear whether inflation risks warrant such expectations.

Dovish ECB Comments Cast Doubt Over Near-Term Rate Hike

Euro remained in relatively tight ranges yesterday against its major rivals following a light macro-economic data schedule provided little direction for the single currency.

Of the notable releases from the Eurozone were comments from two ECB members, de Cos and Villeroy which followed a slightly more dovish rhetoric. Council Member de Cos commented that despite current inflation data showing an upward trajectory that the medium-term outlook remains, that price pressure will subside back to the bank’s 2% target. He also commented that any future potential monetary policy tightening will be gradual.

Continuing the dovish rhetoric, Council member Villeroy commented that investors may have overreacted to the ECB meeting last Thursday and their interpretation of a hawkish pivot by the Central Bank, largely ignoring Lagarde’s comments that any future base rate hike(s) would be gradual. Markets will be closely monitoring upcoming Eurozone data ahead of their March meeting for further clues or evidence of possible policy adjustments.

Looking ahead at today, there is very little tier-one data to provide significant direction for the Euro. German Trade Balance, released earlier this morning, read significantly under expectation at 6.8B versus a consensus forecast of 11.3B.

Dollar Restricted to Narrow Ranges as Markets Eye CPI Inflation Data

Dollar continued to trade in narrow trading ranges on Tuesday following the healthy jobs data report announced on Friday. A hawkish Federal Reserve (Fed) outlook inflated 10-year Treasury yields and persistent inflation forecasts continue to underpin the greenback against most major currency pairs. Yesterday’s economic data releases reported that the US NFIB small-business confidence index declined to an 11-month low of 97.1 in January from 98.9 the previous month. Meanwhile, the US trade deficit widened to $80.7bn for December from $79.3bn the previous month. Elsewhere, US equity further climbed higher on Wednesday after US stocks rebounded, and investors digested another round of positive quarterly earnings results.

Looking ahead to the remainder of this week, markets will pay close attention to Thursday’s Consumer Price Index (CPI) Inflation data for January which may provide further clues on over the timing of future rate hikes. Elsewhere, wholesale Inventories, MBA Mortgage Applications and weekly initial Claims are set for release. Several Fed officials are scheduled to speak as investors look for signals around the pace of the Fed’s intended rate hikes from March onwards. The flash consumer sentiment data for January is scheduled to end the week on Friday.

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