Sterling Makes Gains, But Fragility Remains

Sterling weakened during the European morning session, but gradually recovered some ground as risk appetite recovered. The UK currency was hampered and reduced expectations surrounding Bank of England (BoE) tightening, although the impact was limited by lower yields elsewhere.

Sterling will continue to maintain fragile amidst risk aversion. However, yesterday we saw it make gains against the US Dollar as rhetoric from the Federal Open Market Committee (FOMC) Chair was slightly less hawkish than expected. In the meantime, Nationwide reported an increase in house prices of 1.7% for February with the annual increase at a 7-month high of 12.6% from 11.2% as prices posted a fresh record high. The building society are expecting there would be a slowdown in the sector over the next few months given wider economic pressures.

This morning’s UK services PMI readings for February are final and are expected to confirm preliminary ‘flash’ estimates. Services activity surprised on the upside on the flash reading rising 60.8 in the UK, as Omicron restrictions were eased back

US Greenback Unchanged After Powell’s Comments

Geopolitical developments continued to dominate risk sentiment across financial markets as the Dollar index remained elevated on Wednesday and US Stock futures were relatively unchanged. Federal Reserve (Fed) Chair Jerome Powell commented in front of congress that the Fed will take a measured approach to hike US rates despite geopolitical uncertainties. Financial markets appeared to gain support from the more positive tone of Powell’s comments considering the escalating conflict in Ukraine. He signalled that interest rates will likely be raised at the forthcoming March meeting by 25-basis points, rather than 50-basis points being speculated by some areas of the market. At the same time, Powell left the option open for the Fed to deliver larger rises if needed and dictated by economic data and inflationary pressures. Elsewhere yesterday, the ADP jobs report came in at 475,000 which was better than the consensus forecast of 378,000, the release initially boosted the Dollar ahead of the widely viewed Non-Farm Payrolls data set for release on Friday.

Looking ahead to today, Powell will testify once again, this time before the committee on Banking, Housing and urban affairs. The US ISM services release for February is expected to post an increase from January. Also set for release is US factory orders for January which is expected to have risen by 0.4% and later in the afternoon, the Weekly Jobless Claims are scheduled for release.

Eurozone Inflation Hits All Time High

Inflation in the Eurozone hit an all-time high as the CPI Flash Estimate accelerated to 5.8% for February from 5.1% previously, exceeding the 5.6% markets had been expecting. The Core measure, which removes volatile components such as energy prices, also increased the reading of 2.7% versus 2.3% previously and marginally overshooting the consensus forecast of 2.6%. Energy prices were listed as the main culprit for the surging price pressures currently experienced in the bloc, deepening concerns that inflation could continue to surge as the war in Ukraine threatens to send energy costs even higher. This rather gloomy outlook for the Eurozone economy heaps further pressure on the European Central Bank (ECB) to act on Monetary Policy as we approach the ECB meeting next Thursday. Yesterday, European natural gas prices hit a fresh high and oil exceeded $110.

Bundesbank has warned that German Inflation could average 5% in 2022 in response to growing concerns about growing energy cost pressures. President Joachim Nagel said, “we need to keep our sights trained on the normalisation of monetary policy”. Market expectations have retreated over an ECB interest rate hike in 2022 with bets now indicating only a 15-basis point increase by the end of 2022.

Looking ahead at today, there is a plethora of Final Services PMI readings due this morning. The Final Services PMI for the Eurozone is expected to read unchanged at 55.8. Eurozone unemployment is forecast to show a continued decline, already at pre-pandemic lows, it is expected to read at 6.9% from 7% previously. Finally, the ECB Monetary Policy Meeting Accounts will likely indicate an earlier end to the ECB’s quantitative easing programme but the conflict in Ukraine will likely have complicated the outlook.

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