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Sterling Makes Gains Against the Euro

Yesterday was a quiet day in terms of economic data for the UK. The market was firmly focused on the ongoing geopolitical risk of conflict between Ukraine and Russia. We saw GBPEUR push higher due to the potential impact on European energy supplies should a conflict materialise. This is largely due to the level of reliance on Russian energy.

This morning, the UK unemployment rate held at 4.1% in the three months to December, in line with expectations. There was a further increase in employment for January to 108,000, a record high while headline average earnings increased from 4.2% to 4.3%. The data reinforces the expectations for the Bank of England (BoE) to further increase interest rates over the first half of this year.

The calendar is light for the UK today, but the market will continue to watch the developing geopolitical situation. Tomorrow morning the UK Consumer Price data (inflation) for January will be released. Annual CPI inflation surprised on the upside for a third straight month in December rising to 5.4%, a rate not seen for almost thirty years.

Dollar Gains Support on Geopolitical Tensions and Interest Rate Expectations

The Dollar remained firm on Monday as geopolitical tensions boosted safe-haven demand for the currency and financial markets continue to speculate over the Federal Reserve’s (Fed) policy outlook ahead of the Federal Open Market Committee (FOMC) minutes report. Yesterday, the market focus centred around the rising tensions between Russia and Ukraine after US Secretary of State Anthony Blinken instructed the closing of the US embassy in Kyiv.

Meanwhile, investors will be looking ahead to Wednesday’s release of the FOMC January minutes report which may provide further guidance over policymakers anticipated pace of rate hikes and economic forecasts. Yesterday, St Louis Fed President James Bullard commented that the Fed needs to act quickly to curb the rising inflation rate, having previously called for a full percentage point increase before July. Elsewhere this week, several Fed officials are scheduled to speak which may offer fresh signals over the pace and timing of policy tightening, beginning in March.

Looking ahead to today’s economic releases, investors will review January’s Producer Prices data as a further gauge of future inflationary pressures and following the CPI inflation data released last week. Later this afternoon, the New York Fed Manufacturing Survey for February will draw attention and may reflect that the Omicron variant impact is starting to subside.

European Central Bank (ECB) Stands Firm on Inflation

With no significant economic data releases from the Eurozone, markets looked to geopolitical risk surrounding Ukraine and ECB President Lagarde’s speech for direction yesterday. Lagarde, speaking at the ECB Annual Report before the European Parliament, commented that the ECB will act at the right time to achieve its 2% inflation target over the medium term. However, inflation in the near term is likely to remain high with supply chain bottlenecks persisting but there is evidence that there are signs these are beginning to ease. The ECB maintains their outlook that inflation will regress towards the bank’s target by the end of the year.

Looking ahead to today, the German ZEW will give us an initial indication of Eurozone economic strength for February. The expectation is for the index to read at 55.1, a modest increase from January’s reading of 51.7. The ZEW Economic Sentiment index for the Eurozone is forecasted to read 54.4 versus 49.4 previously.

From a geopolitical standpoint, Olaf Scholz, the German Chancellor, is travelling to Moscow today to meet with Russian President Vladimir Putin in an attempt for diplomacy with the German leader expected to urge Putin to de-escalate the situation on the Ukrainian border. Market’s will keep a close eye on these talks with the possibility for further risk-off movements towards safe-haven currencies.

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