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Sterling Continues To Nudge Higher On Rate Expectations

Sterling pushed higher against both the Euro and Dollar yesterday as yields continued to move higher on the back of further speculation that the Bank of England (BoE) would look to raise interest rates at the November policy meeting. Currently, according to the CME, the BoE Watch Tool, the probability of a hike in November is circa 30%, up from circa 6% a month ago. There were no significant comments on monetary policy from central bank officials during the day.

This morning inflation data recorded a slight decline in the headline rate from 3.2% to 3.1% and marginally below expectations while the core rate edged lower from 3.1%. to 2.9% However, whilst we have seen a slight drop in the value of Sterling, the market has taken this with a pinch of salt knowing the price hike we have seen during the petrol crisis and stockpiling along with the impact of higher wages.

Dollar Remains Weaker On Central Bank Policy Speculation

The US Dollar remained under pressure yesterday as speculation that more central banks will push ahead with interest rate hikes ahead of the Federal Reserve (Fed). The Dollar fell to its lowest level against the Euro in three weeks as investors shifted their focus to inflation data from the Eurozone. Later in the day, a host of Fed speakers helped the Dollar to recover some ground. Fed Governor Bowman commented that the Fed is considering a situation where they may see inflation as broader based than expected a few months ago. Fed Governor Waller also stated he would be in favour of an earlier hike if inflation continues to run higher into 2022. Traders will continue to follow the commentary closely with more speakers due today, including Vice Chair Quarles who will discuss the economic outlook.

Today the Fed will release its beige book update on the current state of the economy. Investors will be looking to confirm expectations around the timing of the first US interest rate hike since the pandemic

Germany Facing Economic Crisis And Polexit Tensions Escalate

Germany is facing an economic crisis due to soaring fuel prices, claimed German business leaders yesterday, as they called for emergency tax cuts. The price of diesel hit an all-time high in the European powerhouse this week rising from €1.23 per litre in January to €1.56. If the cost of fuel continues its upward trajectory it could further weigh down on German output, potentially providing additional negative risk to the Euro.

Tensions continued to escalate between Poland and the EU yesterday. Ursula von de Leyen, the President of the European Commission, while addressing EU leaders implied that the European Union could not survive if Poland wins its rule-of-law dispute on the basis that EU law superseding state law is the cornerstone of EU treaties. The Commission President and Mateusz Morawiecki, Poland’s PM, clashed sharply during their heated debate yesterday with further discussions to come. If tensions continue to escalate, we could see further negative risk for the Euro.

Looking ahead at today, we have both Final CPI and Final Core CPI year-on-year figures due this morning. The forecast is that both readings will remain unchanged at their previous levels of 3.4% and 1.9% respectively.

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