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Sam Jones
March 30, 2022

Mixed Day for Sterling as it Makes Gains and Losses

Sterling Remains Under Pressure Amidst Risk Off Tone

Yesterday Sterling made gains against the US Dollar but lost against the single currency. The move was in large on the back of developments in Ukraine following Russian comments that it will scale back military activity around Kyiv and Chernihiv. In the meantime, UK mortgage approvals declined from the previous month and were below consensus. Although there was a slowdown in the rate of growth in mortgage lending, there was a much stronger increase in consumer credit growth for the month with a stronger overall increase in consumer borrowing. The data overall failed to provide Sterling support as confidence in the economic outlook remained fragile.

Looking to the day ahead, Bank of England (BoE) Deputy Governor Broadbent is scheduled to speak this morning on “the MPC at 25”. Broadbent has always voted with the majority on the Monetary Policy Committee (MPC), so his views on the policy outlook will be closely watched. The BoE has sounded more cautious about prospects for further policy tightening given increasing economic uncertainties and headwinds.

Easing Tension Propels the Single Currency

The Euro posted significant gains after comments from Russian officials that the peace talks with Ukraine had been constructive. Ukraine officials also adopted a more positive stance with comments that enough ground had been made to hold a meeting between President Zelensky and Russian President Putin. There were further developments in Ukraine following Russian comments that it will scale back military activity around Kyiv and Chernihiv. Late in the day, the single currency gave up some of its gains as the top negotiator mentioned that de-escalation did not mean a cease-fire.

In the meantime, German consumer confidence dipped further to -15.5 for March from -8.5 previously and below consensus forecasts of -14.5.

European Central Bank (ECB) council member Holzmann stated that raising the deposit rate to zero this year is critical as failure to act would increase the risk that sharper rate increases would be required next year. He added that the central bank may still be underestimating inflation.

Looking to the day ahead, ECB President Lagarde is due to speak and here rhetoric will be watched closely for clues on policy.

Dollar Weakens as Market Sentiment Improves

Yesterday saw the Dollar lose ground as improved optimism over a diplomatic solution to the Russia-Ukraine conflict allowed risk flows to dictate financial markets. The improvement in risk sentiment came as the Russian Defence Ministry announced it will scale down military activity around Kyiv and Chernihiv. The reaction across financial markets saw the US Dollar Index fall to 98.00 and the Euro trades at a one month high against the Greenback. An improvement was seen across global equity markets which were mostly higher and all three major US stock indexes extended gains with the Dow ending the day 1% higher. The improving sentiment was reflected across treasuries as the US benchmark 10-year yield lost 1.3% and fell to 2.37%

Looking ahead to today, market focus will shift to the latest core PCE figures set for release later today followed by the revised third estimate of Q4 GDP data and ADP employment report which may provide investors with some scope ahead of Friday’s release of non-farm payrolls data.

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