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Focus Turns To ECB Meeting

The single currency remained subdued on Wednesday, before staging a recovery later in the session and ahead of the European Central Bank (ECB) rate decision on monetary policy on Thursday. As per market consensus, the ECB is expected to announce that no changes will be made to their interest rate policy at today’s meeting. The Eurozone is facing the pressure of rising prices due to soaring energy prices following the Ukraine crisis which has seen a surge in commodity prices because of supply chain pressures.

At the ECB’s previous policy meeting, President Lagarde signalled a more hawkish direction, with asset purchases expected to be tapered from Q2. Markets have interpreted that as a signal to pave the way to begin raising interest rates in the second half of 2022. However, a December lift of rate hikes is currently being priced in by market analysts. Lagarde appears set to deliver a neutral tone today and avoid committing to any significant new details regarding policy outlook.   

Elsewhere yesterday, the political Early runoff polls in France showed Macron defeating Le Pen 54% to 46% according to Opinionway and 52.5% vs 47.5% according to Ifop.

US Dollar Weakens As Market Sentiment Improves

The US dollar continued to go from strength to strength during early trading on Wednesday, which saw the Dollar Index hitting highs last seen in May 2020. The greenback remained underpinned by the firmer expectations of a tighter normalisation by the Federal Reserve (Fed) in the next few months and was further supported by Richmond Fed official Barkin’s comments for a quicker move to the neutral rates. In addition, St. Louis Fed Bullard suggested that neutral rates appear insufficient to bring down inflation. The Dollar was further supported as US Producer price inflation which increased 1.4% month-on month in March, the largest increase since December 2009 and above market forecasts of 1.1%.

Today’s US economic calendar includes the Retail Sales report for March and the weekly Initial Jobless Claims data. The UK and other markets will close on Good Friday; however, the US markets are open, and investors will review US industrial production data for March.

UK Inflation Beats Expectations

The standout economic data release on Wednesday reported that UK headline inflation hit 7% in March, beating market expectations of 6.7% and February’s 6.2%, as fuel and food costs pushed ever higher. Inflation is expected to increase further over the coming months and the Bank of England (BoE) has recently signalled that Consumer Price Index (CPI) may exceed 8% in Q2. This leaves policymakers in a delicate position ahead of next month’s monetary policy meeting. Market expectations are currently indicating that the BoE will hike interest rates by a further 25- basis points in May, however, a 50-basis point increase shouldn’t be ruled out with policymakers trying to get ahead of inflation.

Looking ahead today it’s a quiet UK economic calendar ahead of the Easter weekend as markets attention will centre on the European Central bank meeting and Retail sales data from the US.

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