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Sterling Remains Vulnerable to Risk Trends

Sterling continued its slide against the US Dollar amidst the risk-off sentiment due to the escalating situation in Ukraine.

In the meantime, data was positive as the manufacturing PMI index was revised higher to a final 58.0 for February from the flash reading of 57.3 and the strongest reading in seven months. In addition, UK mortgage approvals increased to 74,000 for January from 71,200, which is back above the 12-month pre-pandemic average. It was reported that the growth in this number is due to consumers wishing to lock in before interest rates escalate.

Monetary Policy Committee (MPC) member Saunders, who voted for a 50-basis point increase in February, stated that the risks are on the side of stronger and more persistent inflation. He added that the Ukraine situation would complicate the situation. However, he stops short of committing to vote for a 50-basis point hike at this meeting and indicated he could be voting for 25 basis points. Fellow MPC Member Mann stated that it was vital to curb inflation expectations.

Looking to the day ahead, GBPUSD is likely to be driven by the ongoing risk sentiment. There are a couple of BoE policymakers also scheduled to speak today including external MPC member Tenreyro who typically seems to be the most dovish member of the rate-setting committee.

US Safe Haven Demand Prominent Across Financial Markets

Tuesday’s trading session saw safe haven flows taking control of financial markets as investors rushed to safety on fears that the conflict between Russia and Ukraine could quickly escalate further. Additional western sanctions announced on Russia led to further safe haven flows later in the afternoon, with the Dollar index climbing by nearly 1% and setting around the 97.50 level. Meanwhile, the benchmark 10-year US Treasury bond yield fell by over 6%, hitting its lowest level since early January. Inflationary and supply chain pressures have triggered the price of oil to surge, with Brent crude touching above $110 per barrel yesterday. Investors have begun to cool their expectations for a 50-basis point hike by the Federal Reserve (Fed) in March while taking stock of the situation in Ukraine, while rate projections have been scaled back.

Looking ahead to today, geopolitical tensions will continue to control market attention as the second round of peace talks between Russia and Ukraine are set to take place. Elsewhere, Fed Chairman Jerome Powell will testify before the House Committee later in the day. This is the market’s last opportunity to hear from Fed policymakers before the blackout period ahead of the March policy meeting. The ADP’s private sector employment data will draw some attention ahead of the Non-Farm Payrolls report set for release on Friday.

Single Currency Remains Under Pressure but Market Awaits Inflation Reading

Final Eurozone Manufacturing PMI read below the consensus forecast yesterday, with the index revised marginally down from 58.4 to 58.2. Both the French and German index also read below forecasts and demonstrated contraction against their previous readings, reporting at 57.2 and 58.4 respectively. Conversely, the Spanish manufacturing sector reported an expansion reading of 56.9 versus a 55.9 forecast and a previous figure of 56.2. Italian PMI exceeded the forecast but read in line with the previous reading of 58.3. As one might expect, the impact on the Euro remained relatively muted to the readings as traders remain focused on geopolitical risk.

Looking ahead at today, Spanish unemployment change showed a decrease in unemployment by 11.4k, undershooting the forecast of -44.5k. Eurozone CPI Flash estimate and Core Flash estimate are expected to show an increase in inflation to 5.6% and 2.6% respectively. Both will be watched very closely by investors ahead of the European Central Bank (ECB) meeting next week (10 March) for further evidence regarding the possible short-term need for monetary policy adjustment.

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