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Sterling Weathers the Grey Clouds

Sterling fluctuated following the interim publication of the Grey report. Senior civil servant Ms Grey concluded there was a “failure of leadership” over the 16 events she examined. However, the full report has not been published while the police investigate alleged COVID-19 rule-breaking. The Met Police has confirmed it has received more than 500 pages of documents and 300 pictures as part of its investigation, adding that it expects to conduct interviews with people who have “potentially breached” the rules. So far, there has been no immediate move to oust Prime Minister Johnson by Conservative MPs. This coupled with expectations that the Bank of England (BoE) will raise interest rates on Thursday helped underpin sentiment pushing Sterling higher. 

Looking to the day ahead, money supply and bank lending measures for December may provide indications of the extent to which the rise in Omicron cases has impacted spending. In the meantime, the market will focus on the fallout from the ongoing party-gate scandal.

Federal Reserve Officials Dampen Expectations

The Greenback started the week on the back foot as month-end flows played their part. The market continues to deliberate the prospect and the pace of an interest rate hike for this calendar year. Following last week’s central bank meeting the market has raised bets on the pace of increases since Powell spoke, shifting to roughly five this year versus the three those officials forecast in December. However, San Francisco Federal Reserve (Fed) Chief Mary Daly stated that rates could rise as early as March whilst denying the Fed was behind the curve and cited several risks facing the economy in addition to the ongoing pandemic, including headwinds as fiscal support fades. Compounding the view that the market may be overestimating the pace of hikes was Atlanta Fed President Raphael Bostic who told Yahoo Finance that his outlook called for three increases in 2022 and he did not favour raising rates by 50 basis points in March.

Looking ahead to today, ISM Manufacturing and PMI data for January is set for release and will provide an update on the sector, meanwhile, investors’ attention will turn to the key jobs report on Friday.

Markets Pricing in An ECB Rate Hike in September

Eurozone growth slowed through the winter months as fourth-quarter GDP figures showed the bloc grew by just 0.3% because of a wave of new COVID-19 infections and subsequent restrictions. Overall expansion was mostly hindered by Germany who contracted by 0.7% in Q4, leaving the European powerhouse economy facing recessionary fears. Fortunately for the single market, France, Italy, and Spain all exceeded growth expectations.

German Prelim CPI increased to 0.4% for January versus a forecast of -0.2% and a previous reading of 0.5%. The annual rate read 4.9%, down from the previous figure of 5.3% but far exceeding the 4.3% expected by analysts. The readings reinforced market expectations that the European Central Bank (ECB) will look to tighten monetary policy this year, with money markets now pricing in a 10-basis point hike in interest rates by September 2022.

Looking ahead at today, there is a plethora of data from the Eurozone. German Retail Sales for January read significantly below forecast this morning, contracting by -5.5% versus a forecasted reading of -1.3% and previous the figure of 0.6%. French Prelim CPI month-on-month read 0.3%, exceeding a forecast of -0.2% and previous reading of 0.2%. We also have PMI Manufacturing data from Spain, Italy, France, Germany, and the final figure for the Eurozone as a whole. The index readings are secondary and not expected to be revised significantly from the initial reports.

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