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Jamie Jemmeson
January 26, 2022

Sterling Hold Firms Despite Police Investigation

UK Retail Sale Post Positive Reading. Can This Continue?

Sterling remained resilient yesterday despite the negative data earlier in the week and the ongoing uncertainty surrounding “partygate”. The Confederation of British Industry (CBI) industrial orders index was unchanged at 24 for January and slightly above market expectations. However, in line with the media reports, companies have stated that shortages of skilled labour were hampering production plans with the situation at its most serious since 1973. This only increases the pressure on the Bank of England (BoE).

Markets were continuing to monitor political developments as the police announced that there would be an investigation into allegations surrounding social events at Downing Street. There are some tentative reports that the Sue Grey report will be released today despite the police investigation taking place.

Attention Turns to FOMC as Markets Predict a March Rate Hike

Yesterday’s US data showed that headline Consumer Confidence fell to 113.8 in January from 115.2 in December, which was less than the expected decline to 111.8. The rapid spread of the Omicron COVID-19 variant in the US was cited as the main reason for the slight drop, however, levels remain above pre-pandemic lows and supports the Federal Reserve’s (Fed) view that the economy has become more resilient to each new COVID wave. Elsewhere, the US Philadelphia Fed non-manufacturing index dropped to -16.2 in January from 27.3 the previous month, with a slowdown in new orders growth.

Elsewhere yesterday, the IMF forecasted U.S. growth at 4.0% for 2022, down 1.2 percentage points than previously predicted. The economic impacts of the Omicron variant noted the reason for the lower revised forecast, with increased restrictions and enforced lockdowns adding to the new prediction. The course that was previously predicted with a vaccines program has been disrupted by the onset of the new variant and has set back the recovery. The pandemic has also been one of the key drivers of reduced numbers in the labor force and affecting the supply chain disruptions.

Focus today turns to the Federal Open Market Committee (FOMC) January meeting as markets will digest updated guidance from US policymakers. Fed officials’ communication ‘blackout’ started on January 15, leaving financial markets without any significant policy cues for nearly two weeks leading up to the meeting. Markets are expecting the Fed will signal a rate hike for March with the commentary to be watched very closely.

Positive IFO Gives Glimmer of Hope to German Economy Despite Possible Backdrop of Technical Recession

The German IFO confidence index exceeded the forecast yesterday, strengthening to 95.7 for January from 94.8 in December and a forecast of 94.6. The increase in the expectations component of the index represents the first since June last year, providing a glimmer of hope for the German economy during the potential backdrop of a German technical recession. What we can decipher from the reading is that there now appears to be a growing comfort that current Omicrom COVID restrictions and supply chain frictions will start to ease.

Deutsche Bank has revised forward its forecast for a European Central Bank (ECB) interest rate hike to December 2022. The Bank’s Chief Economist, Mark Wall, now expects the ECB to raise the base rate by 25 bps in December this year in a move that could provide some positive direction for the Euro.

Looking ahead at today, there are no meaningful data releases from the Eurozone to offer much direction for the single currency. Therefore, markets will focus on growing geopolitical tensions along the Ukrainian boarder.

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