Jamie Jemmeson
January 13, 2022

Sterling Shrugs-off Political Uncertainty

The Sterling pushed to fresh 2-month highs against the US Dollar after the release of the US inflation data. There were speculations that higher yields had already been priced in and markets are monitoring the political developments related to the lockdown party in December 2020. Prime Minister Boris Johnson is also under pressure as the Conservatives called for his resignation after his public apology in the House of Commons. Although the possibility of him resigning continues to increase, Sterling remains unaffected by the uncertainty that this could cause – such as the impact of post-Brexit talks.

The Tories appear determined to wait for the results of a formal investigation before taking any action: a vote of confidence on Boris Johnson would require the support of letters from the Tories to the 1922 club. The local election in May could have a large impact if he remains as Prime Minister until then.

Looking to the day ahead, it’s quiet on the data front but the market will keep a close eye on political developments.

Greenback Weaker following Higher CPI Inflation Data

The US Dollar weakened against several major currencies on Wednesday following the release of December’s CPI Inflation Data. The Consumer Price Index increased to 7% year-on-year with the core reading (excluding food and energy prices) beating expectations at 5.5% in December – up from 4.9% in November. The latest figures will continue to put pressure on Federal Reserve (Fed) policymakers to adopt a faster pace of policy tightening with central banks forecasting a March rate hike with three further hikes this year.

Yesterday, Fed Governor Lael Brainard stated that tackling rising inflation and getting it back down to 2% while sustaining an economic recovery is the Central Bank’s most pressing task. Expectations of higher inflation rates had largely been priced in by financial markets and the Dollar weakened sharply following the announcement as equity markets rallied and US Treasury yields fell.

Attention today turns to the release of weekly initial jobless claims data and December’s Producer Price Index as investors look for updated guidance on the economic outlook.

Industrial Production Figures Provide Upside Hope

Yesterday proved to be a very quiet day for Eurozone key data releases. However, the Eurozone Industrial Production figures surprisingly increased to 2.3% for November against the forecast of 0.1%. The year-on-year figure represents a decline in industrial production of 1.5% marking a year of supply-chain woes, COVID-19, and a surge in energy prices. The outlook for industrial production across the EU is still clouded as energy prices within the single bloc adjust. But with the new Omicron variant compounding supply-chain issues and bottlenecks, we could expect marginal increases in industrial activity over the coming quarters. Elsewhere, equity markets continue to climb yesterday with the Euro Stoxx up by approximately 0.8%.

Looking ahead to today, it’s another quiet day on the data front. The European Central Bank’s (ECB) Economic Bulletin was published this morning which will provide some analysis on the current and future economic conditions from its standpoint. However, this tends to have a muted impact on the markets as sections of the report are released early. Elsewhere, the Italian Industrial Production month-on-month figures are forecasted to show a modest 0.4% increase.

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