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Pill Cools UK Rate Expectations

Yesterday was a quiet day in terms of economic data releases leaving the UK to focus on comments from Huw Pill, the Bank of England’s (BoE) Chief Economist. Pill stated that policymakers should raise interest rates gradually rather than taking an “aggressive” activist approach. In addition, Pill hinted that the market is overestimating the scale of monetary tightening the BoE was likely to deliver over the next year. 

Pill’s rhetoric sets up today’s comments from BoE’s Gov Bailey who is due to speak at an online event hosted by TheCityUK. The market will be watching for further clues on the outlook for UK monetary policy. Most of last week’s policy update was broad as expected but the hawkish surprise was that 4 of the 9 Monetary Policy Committee members voted to hike interest rates by 50 basis points rather than just 25.

Greenback Remains Steady Ahead of Key Inflation Data

Today’s US CPI number is likely to trigger a break of narrow trading ranges and a subdued market mood. The annual Consumer Price Index (CPI) is expected to reach 7.3% in January, following December’s 7.0% gain. The core CPI figure, which excludes food and energy prices is projected to increase from 5.5% in December to 5.9% in January. The monthly inflation rate is predicted to increase from 0.5% to 0.6%. Elsewhere yesterday, US 10-year Treasury yields softened by 5-basis points from the recent peak of 1.97%, dropping back to 1.92% as investors await January’s inflation data which will set the direction for benchmark yields. Elsewhere yesterday, general market risk sentiment would have been boosted by Cleveland Federal Reserve Policymaker Loretta Mester’s comments that interest rates were likely to rise, however, there was no strong case for an immediate 50-basis point hike and policymakers are not looking to unnecessarily disrupt financial markets.

It’s another quiet day for economic data releases today with the updated weekly Jobless Claims data scheduled following the release of January’s key Inflation data.

Bundesbank Applies Pressure to ECB

The Euro was once again confined to relatively tight ranges against its major rivals yesterday with a baron macro-economic calendar contributing to fairly directionless trading. Of the few data releases of note was the German Trade Balance which showed the surplus-value between exported and imported goods narrowing to €6.8bn in December from €10.8bn previously. Elsewhere, Italian Industrial Production figures read below consensus, contracting by 1% versus an expected contraction of 0.8%.

President of the Deutsche Bundesbank, Joachim Nagel, commented that he would support a normalisation of monetary policy should the inflation outlook not change by March. Adding to the hawkish rhetoric, he commented that acting too late will have significantly higher costs than adjusting policy too early adding to the pressure on ECB policymakers ahead of the March meeting.

Looking ahead at today, the European macro schedule remains sparse with the only notable release being EU Economic Forecasts due this morning.

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