It was a quiet day in the UK yesterday as there was no major economic data released. The market continues to debate the path and pace of interest rates and are awaiting Bank of England (BoE) Gov Bailey’s speech on Thursday to decipher it for further clues. In the meantime, political unrest surrounding PM Johnson leadership remains. It is likely that the next driver in this story could be the local election in May; however, any further leaks cannot be ruled out.
This morning British Retail Consortium data recorded an 8.1% increase in like-for-like retail sales for January from 0.6% previously as sales were hit by lockdowns last year; as a result, this had very little impact on Sterling.
Looking to the day ahead, it is another quiet day in terms of economic data. Markets will keep a close eye on rhetoric from central bankers, political movements and the geopolitical tensions between Ukraine and Russia.
ECB Policymaker Hinting at October Rate Hike
European Central Bank (EBC) Policymaker Klaas Knot said the ECB may raise interest rates as soon as October to combat inflationary pressures as some forecasters now predict inflation will likely remain at 4% throughout the year. Mr Knot expects a 0.25 basis point rise, with an additional increase in Q2 2023 whereas markets are pricing in two hikes this year with the first in July following ECB President Lagarde’s commentary at the ECB meeting last week.
To the contrary, ECB President Lagarde commented yesterday that inflation is expected to remain high in the short term but there is no need for a big shift in monetary policy as she expects inflation to revert towards the bank’s 2% inflation target before price pressures get entrenched. Lagarde appeared slightly more cautious yesterday but did comment that the central bank needed to maintain flexibility regarding Monetary Policy moving forward. The next ECB policy meeting is set for 10March and is likely to be a crucial one for rate-setters.
German industrial production declined by 0.3% in December, undershooting estimates of a 0.4% increase in output. The reading means that German industrial output remains almost 7% below pre-pandemic levels attributed mostly to ongoing labour and raw material shortages. Additionally, the Eurozone Sentix investor confidence index strengthened to 16.6 for February, up from a January reading of 14.9 and exceeding forecasts of 15.2.
Looking ahead at today, there is very little ‘high-impact’ data with Spanish industrial output and Italian retail sales unlikely to drive a significant direction in the Euro.
Greenback Consolidates After Last Week’s Sharp Downturn
Following its largest weekly fall since March 2020, the greenback consolidated against most major currency pairs on Monday, supported by Friday’s better than expected January Non-Farm Payrolls (NFP) data. The updated jobs data showed that Non-Farm Payrolls jumped by 467,000 in January, beating expectations while signalling that labor market conditions support the Federal Reserve’s (Fed) outlook and expectations of a lifting of rates in March. During Monday’s trading, the benchmark 10-year US Treasury bond yield continued to test the 2% mark, providing support to the Dollar on a quiet day of data releases to start the week. Elsewhere, overnight US President Joe Biden spoke in a press conference alongside German Chancellor Scholz to warn Russia over possible implications should Russia invade Ukraine.
Looking to today, it’s a relatively quiet day in terms of scheduled economic data releases as markets look ahead to Thursday’s updated Inflation data for short-term direction. The Consumer Price Index (CPI) report will be closely monitored as we expect headline inflation to hit a record level of 7.6%, up from 7.0% in December. Meanwhile, later in the day, the NFIB Small Business Survey and monthly trade data are set for release.
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