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Sterling Makes Gains on Trade Deal And Hopes of Sunak Relief

Yesterday Sterling made gains against both the single currency and US Dollar on the back of various newswires. Firstly, rumours circulated that Rishi Sunak plans to help British families struggling with a surge in energy prices and the cost of living, adding to £21bn of measures already announced, in his Spring Statement that is due today. Secondly, the US and UK reached a deal to ease tariffs on British steel and aluminium. The deal will allow 500,000 metric tons of steel annually to be imported duty-free, with higher amounts subject to tariffs, starting 01 June, the Commerce Department said.

This morning UK inflation rose to a 30-year high as prices rose by 6.2% from 5.5% in the 12 months to February as fuel, energy and food costs surged. The outturn was stronger than both the market consensus and our forecast for a rise to 6.0%. Core CPI inflation, excluding food and energy, increased from 4.4% to 5.2%. Prices are rising faster than wages and the Bank of England (BoE) thinks it could hit double digits this year.

Today Chancellor Rishi Sunak will unveil the Spring Statement (12:30GMT) which will take place amid sharply rising inflation and calls for additional support to deal with higher energy costs. However, media reports suggest next month’s National Insurance increase will probably go ahead (to fund the NHS). In the meantime, Federal Reserve (Fed) Chair Powell and BoE Governor Bailey are among participants on the second day of the BIS Innovation Summit.

US Focus Will be on Powell’s Speech

The US Dollar came under some selling pressure on Tuesday after failing to hold on to recent gains as markets weighed up recent hawkish comments from Fed officials against improving risk sentiment. The risk-positive environment saw the US Dollar index fall and the benchmark 10-year Treasury yield climb to its highest level since May 2019. Yesterday also saw a rally in global equities as the S&P Index rose more than 1% after Fed Chair Jerome Powell opened the door for raising rates by more than 25-basis points at upcoming policy meetings if required to tame rising inflation rates. The hawkish commentary was largely offset by yesterday’s rally across equities and the unwinding of recent safe-haven flows. Elsewhere yesterday, the Wall Street Journal reported that US President Biden was planning to sanction “hundreds of Russian lawmakers” as early as Thursday.

Looking ahead to today there is another chance for Fed Chair Powell to deliver his message on tackling inflation as he speaks at the BIS Innovation Summit panel. Also scheduled for release later in the session is February’s new home sales figures on an otherwise quiet economic calendar.

Eurozone Monetary Policy Remains in Focus

The eurozone current account surplus was unchanged at €22.6bn for January. In the 12 months to January, the surplus widened to €294bn and 2.4% from €247bn the previous year. There were still substantial capital outflows over the year with net outflows of over €500bn. Underlying Euro sentiment remained negative, but the currency was resilient ahead despite the ongoing tensions in Ukraine. Monetary policy remains in focus with European Central Bank (ECB) council member Villeroy stated that the central bank needed to normalise policy to keep inflation expectations anchored. This afternoon, eurozone consumer confidence figures are due for release.

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