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Jamie Jemmeson
February 17, 2022

Sterling Rises On Inflationary Pressures

UK Retail Sale Post Positive Reading. Can This Continue?

Yesterday the UK’s headline inflation was released in the form of the Consumer Price Index (CPI) which show that prices surged by 5.5% in the 12 months to January, up from 5.4% in December according to the Office for National Statistics (ONS). Inflation is now outpacing wage growth as energy, fuel and food costs continue to rise, squeezing household budgets. Inflation is expected to grow to 7% in April with the removal of the energy cap. Sterling pushed higher throughout the day as pressure continues to mount on the Bank of England (BoE) to hike more aggressively.

It’s quiet today with no major data set for release. It is worth noting that UK retail sales are due for release tomorrow morning at 07:00. The last couple of reports have seen particularly large swings with sales falling by 3.7% in December after rising by 1% in November; this could be down to changing trends such as Black Friday and Cyber Monday sales in November. The market will be particularly interested in consumer spending given the documented and signposted inflationary pressures.

Greenback Remains Subdued as Minutes Report Offers no New Clues Over Pace of Rate Hikes

Having lost ground on Tuesday, the Dollar recovered in yesterday’s trading session as risk-sentiment fell and safe-haven demand increased. US stocks dropped through the day on Wednesday and investors mulled over the latest Federal Open Market Committee (FOMC) minutes report, earnings figures, and ongoing geopolitical developments. The Russia-Ukraine tensions continue to dominate market focus and yesterday saw the mobilisation of Russian troops near the Ukrainian border which resulted in a reversal in risk appetite across markets.

The main take away from the FOMC January minutes reports was policymakers acknowledging that the imminent rate tightening cycle will differ from the previous cycle, with tightening set to be quicker in response to record inflation rates. The overall nature of the report was considered slightly less hawkish as policymakers did not discuss whether a 25-basis point or 50-basis point hike will be needed at the March meeting, only confirming that tightening is required. The initial reaction saw the Dollar weaken later in the session losing ground against the Euro and Sterling.

A light day today as investors will get the chance to review weekly initial jobless claims and updated housing data. There are a couple of key Federal Reserve (Fed) officials set to speak later in the session with Cleveland President Loretta Mester and St. Louis President James Bullard scheduled to speak. Close attention will be given to Bullard’s comments having recently voiced that US interest rates will need to rise aggressively in the near term to regain credibility.

EU Eases Gas Concerns

The Euro struggled for direction against its major rivals yesterday following a baron macro-economic data schedule for the Eurozone. The only notable release showed that Industrial Production for February increased by 1.2%, exceeding expectations of a 0.4% rise but below January’s 2.4% growth.

From a Geopolitical standpoint, optimism surrounding de-escalation on the Ukrainian border was relatively short-lived with several high-ranking Western officials commenting that there is little evidence to suggest Russia is withdrawing troops and could suggest to the contrary. UK Foreign Secretary Liz Truss commented that Putin could drag out the Ukrainian crisis for months which could further negatively impact financial market confidence and promote further safe haven flows, potentially weighing on the Euro.

European Commission President Ursula von der Leyen insisted yesterday that Europe can cope if Russia decides to weaponise gas supplies over the Ukrainian crisis commenting that several countries were ready to step in should Russia limit gas exports to the Bloc. Currently, Europe imports approximately 40% of its gas supply from Russia.

Looking ahead to today, we have the European Central Bank (ECB) Economic Bulletin and Italian Trade Balance due this morning. Neither is expected to provide significant direction for the Euro.

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