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Sterling Rises on the Strong Services

Sterling received a boost yesterday as the UK PMI services sector index was revised up significantly to a final reading of 62.6 from the flash reading of 60.9. This was the strongest reading for 10 months as COVID-19 restrictions were eased in the travel and leisure sectors. However, on a slight negative, business optimism dipped to a 17-month low. Unsurprisingly there was further strong upward pressure on costs.

Sterling gains were capped given the unclear picture surrounding the path of interest rates. Whilst the market is still pricing in 2% by year-end, question marks are increasing due to the loss of momentum we could see because of the cost-of-living pressures and the ongoing impact of the war in Ukraine.

The day ahead sees the March UK PMI construction report will provide a timely update on the sector. The February reading saw output rise at its fastest pace since mid-2021.

Dollar Climbs Ahead of Federal Reserve Minutes

The US Dollar continued to trade at elevated levels against several major pairs on Tuesday, supported by hawkish comments from Federal Reserve (Fed) officials. The greenback was further supported as investors’ confidence faded on increasing tensions over economic growth and as fresh sanctions are prepared to be placed by the west against Russia. Tuesday’s trading saw US stock markets extend their losses, ending the day sharply lower. Meanwhile, the Dollar Index appreciated above 99.5, underpinned by hawkish comments from Fed officials. Fed governor Lael Brainard signalled support for higher interest rates to combat rising inflation rates and indicated that a reduction of the banks’ balance sheet could begin in May.

Last week’s robust jobs data, falling unemployment rate and higher wage growth have supported the case for monetary policy tightening.

Looking forward to today, the focus will remain on the Fed and the March meeting’s minutes report due later in the day. Investors look for any fresh signals surrounding the pricing of the rate hike in May and for indications as to how close policymakers were to vote for a 50-basis point hike in March.

Euro Slides Despite Positive Economic Activity

The eurozone PMI services index for March was revised up to a 4-month high. However, like in the UK, there was a dip in business optimism to a 17-month low while strong upward pressure on costs continued with input costs and output charges both increasing at record-high rates for the month.

The single currency remained under pressure given the escalating tension in Ukraine. The EU Commission and the US announced fresh sanctions on Russia including an import ban on coal and a ban on Russian ships docking in the EU.

Looking to the day ahead, February’s producer price data will provide further information on pipeline inflationary pressures. In the meantime, European Central Bank (ECB) Chief Economist Lane is set to speak. Last week he noted that eurozone inflation is mostly imported and that in setting policy the ECB needed to weigh that against the potential risk of a slowdown in growth due to the impact of the war in Ukraine.

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