Sterling made gains against both the single currency and US Dollar before giving up some gains against the Greenback late in the day.
Their rationale for Sterling’s momentum was because of expectations that Chancellor Sunak would provide significant fiscal relief in this week’s spring statement, recognising the cost-of-living crisis developing. In addition, this could also be potentially important in giving the Bank of England (BoE) greater leeway to raise interest rates to tackle inflation pressures. Released this morning was the UK public finances data for February. This showed a monthly rise in net government borrowing of £12.3bn. That was higher than expected but down from £15.2bn for the same month last year. It is further confirmation that this fiscal year’s budget deficit will be much lower than was forecast in the autumn leaving Chancellor Sunak with some wiggle room.
Dollar strength dominated from late in the European session following the comments from Federal Open Market Committee (FOMC) Chair Powell.
US Greenback Supported Following Powell’s Comments
The US Dollar was supported against several major trading pairs on Monday, extending gains from Friday after Federal Reserve (Fed) Chair Jerome Powell commented that US interest rates could increase more than the previously signalled 25-basis point increments to tame rising inflation. The Fed announced a 25-basis point hike last week in a move to combat rising inflation while protecting economic conditions. Powell was speaking to a National Association for Business Economics conference in Washington and repeated that the Fed’s reductions to its balance sheet could begin in May. Following the comments, the 10-year US Treasury bond yield rose sharply, hitting its highest level since May 2019 above 2.3% and the Dollar Index continues to trade above 98.00.
The economic calendar does not feature any high-level macroeconomic data releases today. Investors will keep a close eye on several central bank speakers and developments surrounding the Russia-Ukraine conflict. Fed policymakers are scheduled on the calendar every day this week, providing short term direction for financial markets over the coming days.
Focus on ECB Speaker
The Euro came under pressure against a stronger US Dollar on Monday and the focus continues to remain on the Russian invasion of Ukraine and its knock-on effects on the European economy. European Central Bank (ECB) President Christine Lagarde yesterday moved to play down fears about Euro-area stagflation, despite Russia’s invasion of Ukraine starting to weigh on the economy while further stoking already-record gains in consumer prices.
Looking ahead to today, several ECB speakers are set to speak including ECB President Christine Lagarde, providing fresh clues around the timing and pace of interest rate hikes. Meanwhile, January Eurozone current account data is also set for release later in the session. Key data releases scheduled for release include EU flash PMIs for manufacturing and services where both are expected to show a sharp fall on a month on month reading.
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