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Sterling Rate Expectations Soften

Yesterday we saw Sterling weaken slightly as interest rate expectations were dampened. Deputy Governor Dave Ramsden was less bullish about raising interest rates quickly. The Bank of England (BoE) raised interest rates to 0.5% this month from 0.25%, but Ramsden was part of a minority who voted for a bigger increase to 0.75%, which would have been the first half-point rise since BoE independence in 1997. However, his tone yesterday was more cautious as he stated, “some further modest tightening in monetary policy is likely to be appropriate in the coming months”.  Ramsden went on to state “new shocks can arise – we did not foresee the recent rise in energy prices, and as we meet today the crisis in Ukraine is intensifying – and so we should remain humble about the possibility that things might turn out differently”.

Looking to the day ahead, BoE Governor Bailey and three Monetary Policy Committee (MPC) colleagues will testify to the House of Common’s Treasury Select Committee for the quarterly update. Hot on the agenda is likely to be when the back-to-back interest rate hikes might occur but more importantly what they are expecting from monetary policy moving forward. The market will look for clues as to whether we will see further rate hikes in both March and May. Whilst the BoE members may not explicitly say whether this is the case, the rhetoric will provide the market with clues as to how they are currently thinking.

German Sentiment Improves as Omicron Fades

The headline German IFO business confidence index significantly exceeded forecast yesterday, strengthening to a 5-month high of 98.9 for February versus an expectation of 96.4 and a previous reading of 96.0. The Current Assessment Index increased to 98.6 from 96.2 whilst the Expectations Index also strengthened to 99.2 from 95.8. The IFO stated that the German economy is expecting an end to the COVID-19 pandemic but the situation in Ukraine remains a significant risk factor. We did see a slight market reaction to the reading, with EUR/USD edging 0.15% higher on the day.

Financial markets are continuing to monitor the Ukrainian crisis amid Western powers announcing the imposition of sanctions against several Russian banks and a select few oligarchs. Germany announced that, as part of their sanction list, the Nordstream 2 pipeline which feeds Germany gas from Russia would not be approved for use resulting in gas prices soaring.

Looking ahead at today, its relatively quiet on the data front all round. Final CPI year-on-year figures are due from the Eurozone this morning but are not expected to change at 5.1%. Therefore, the Euro will likely look to geopolitical developments for direction today.

Risk Aversion Continues to Dominate as US Confirms Russia Sanctions

All three major US stock markets fell sharply on Tuesday as risk aversion continued to dominate currency markets. Following the sanctions announced by UK Prime Minister Boris Johnson, US President Joe Biden held a press conference to announce the first tranche of US sanctions against Russia, targeting Russian banks, the country’s sovereign debt and three individuals. Outside of these comments, Biden’s tone remained soft with an emphasis on defending NATO territories which helped to stabilise financial markets and saw US stocks ending the day slightly higher.

Elsewhere it was a quiet day of economic releases yesterday, with the US flash PMI data indicating economic expansion and continued recovery from the effects of the Omicron variant. Meanwhile, Atlanta Federal Reserve (Fed) Official Bostic commented that Fed policymakers will let upcoming data guide the pace of rate hikes and timings in a slightly dovish tone, although investors remain firm that monetary policy will be aggressively tightened.

It’s a light economic calendar today as investors focus turns to tomorrows release of updated GDP data.

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