BoE Governor Bailey’s Tone Turns Dovish

Yesterday the market was awaiting comments from Bank of England (BoE) Governor Bailey following some negative data releases in recent days. Bailey stated that the UK was facing a very large shock to income and spending while the shock from energy prices this year is likely to be larger than any single year in the 1970s.

Bailey went on to state that the bank is beginning to see evidence of a slowdown in the economy while there is a very large trade-off between inflation and output. Risks are evident in both directions to the outlook and trade-off situations are very difficult to deal with.

Currently based on the implied rates on Reuters Eikon, interest rates are likely to be circa 2% by year end, which means there could be another 5 hikes in the next 6 meetings. However, the overall rhetoric continues to cast doubt as to whether the bank would pursue an aggressive run of interest rate hikes. The market will focus on data releases and further economic comments. The path of Sterling may be tied to the interest rate outlook so it will be interesting to see if markets react to an economic slowdown if it materialises.

US Dollar Remains Supported on Fed Policy Expectations

The US Dollar Index consolidated its recent gains of around the 99.00 level overnight and remained close to its highest levels in two years as markets increased their bets on the Federal Reserve (Fed) adopting a more aggressive approach towards policy tightening. Elsewhere yesterday, commodity process fell and hopes of progress in peace talks between Ukraine and Russia have boosted market sentiment which in turn saw global equity markets end the day higher. Meanwhile, the benchmark 10-year US Treasury bond yield remained below 2.5%, having reached a multi-year high of 2.55% on Monday, providing further support for the Dollar.

It’s a quiet day ahead on the US economic calendar as investors look to the Conference Board’s Consumer Confidence Index and January Housing Price Index. Also set for release is February JOLTS job openings data. Later in the session, Philadelphia Fed President Harker is scheduled to discuss the economy at an event hosted by the Centre for Financial Stability in New York. Later in the week investors’ attention will turn to Core Personal Consumption Inflation data and the Non-Farm Payrolls data schedule for release on Friday.

EU Focus Continues to Centre Around Peace Talks

A relatively limited day of data releases yesterday saw investors focus remain firmly on geopolitical headlines. The latest reading of German consumer confidence showed a decline to -15.5 from -8.5 the previous month and reflecting the combined impact of rising prices and the war in Ukraine.

There are no major releases due for release across the Eurozone today as focus will centre around peace talks between Russia and Ukraine, which have contributed to lifting sentiment at the start of this week. Later in the week markets will look to Eurozone inflation data for the latest monetary policy steps by the European Central Bank (ECB).

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