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Sterling on The Backfoot Despite Positive Data

Yesterday we saw Sterling slide against the US Dollar following signposting from the Federal Open Market Committee (FOMC) of potentially more activity around interest rates to control inflation. In terms of economic data, the CBI retail sales index strengthened sharply to 28 in the year to January from 8 the previous month and well above market expectations of 13. However, this was largely ignored due to the inflated nature of the figure as last January harsher lockdown restrictions were in place. Inflationary pressure remains a cloud over February’s outlook and markets remained wary over the squeeze on incomes during the second quarter.

The Gray Report on the Downing Street parties is still under wraps as legal issues are being debated due to an official police investigation starting.

Looking to the day ahead, there is no official data set for release, but the market has plenty to keep an eye on. Political development at home and abroad remain in focus. Risk on and off is currently being driven by the ongoing sentiment surrounding the Ukraine-Russia tensions. Next week the big focus will be on the Bank of England (BoE) meeting where the market is expecting interest rates to be raised; the key focus will be on the rhetoric that follows. This week we have seen the FOMC rhetoric change opinions on the direction on the outlook for interest rates; could the BoE messaging do the same?

US Dollar Extends Gains Supported by GDP Data

The US Dollar extended its gains into a second day on Thursday, advancing against several major pairs to levels not seen since June 2021. Wednesday’s Fed-fuelled rally and hawkish outlook was further reinforced by better-than-expected GDP data, which showed that the economy expanded at an annualised rate of 6.9% in the fourth quarter, from 2.3% previously and above expectations of 5.5%. Consumer spending reported growth of 3.3% compared with 2.0% in the third quarter. The Fed’s hawkish outlook saw global equities drop sharply on Wednesday as markets speculated over the possibility of five quarter-point hikes in 2022. Following Fed Chairman Jerome Powell’s comments, the dollar index rallied to levels not seen since June 2020 and US 10-year US Treasuries yield advanced toward 1.8%.

Elsewhere yesterday, ongoing tensions between Russia and Ukraine continued to weigh on market sentiment. US president Biden said there was an increased possibility that Russia could invade Ukraine in the next few weeks. Meanwhile, initial jobless claims reportedly fell to 260,000 last week against a revised expectation of 290,000.

Looking ahead to today, markets will review the Fed’s preferred gauge of inflation as the Bureau of Economic analysis released December’s Personal Consumption Expenditures (PCE) Price index. To end a busy week of data releases, markets will review personal spending and personal income figures later in the session.

German GDP in the Red

Unfortunately, yesterday proved another quiet day for Eurozone macro-economic data. Of the limited releases we did see, the most notable was the German Gfk Consumer Climate index which recovered marginally to -6.7 for this month versus -6.9 in December demonstrating a slight improvement in consumer confidence. Despite surprising the upside, the Euro was unable to capitalise and recover some of the ground previously lost to its major rivals.

As markets open this morning, EUR/USD has opened towards the bottom half of the $1.11-1.12 range, representing its lowest level since the first half of 2020.

Looking ahead at today, German Prelim GDP showed a -0.7% contraction for the fourth quarter of 2021. This was a greater contraction than expected, with the consensus being -0.3%. Conversely, French Flash GDP showed a 0.7% expansion in the fourth quarter of 2021 representing the fastest GDP growth for the French economy last year in five decades. Overall GDP growth achieved 7% in 2021, the highest since 1969, following an 8% contraction in 2020 due to COVID-19 lockdown restrictions.

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