Sterling edged lower yesterday with the latest batch of UK data releases causing further concerns over the outlook. There were important concerns that the official level of GDP would be undermined by a dip in healthcare spending as COVID-19 testing was scaled back sharply. The monthly GDP rose by 0.1% in February, down from 0.8% in January, against a forecast of 0.3%.
Compounding the concern was the British Retail Consortium (BRC) data recording a 0.4% decline in like-for-like retail sales for March from 2.7% previously while inflation pressures increased to an 11-year high. This morning we have just seen the UK labour market data recording a slight decline in unemployment to 3.8% from 3.9%, however, the average earnings increase at 4% still is well shy of the inflationary figures and piles further pressure on the Government to act. The gap between inflation and earnings shows the biggest fall in living standards in 8 years.
Looking to the day ahead, it is quiet in terms of economic data. The market will be keen to articulate the inflation reading tomorrow which is expected to rise to 6.7%.
US Dollar Remains Supported Ahead of Inflation Data
The US Dollar continued to remain elevated on Monday as government bond yields soared amid concerns related to skyrocketing inflation and the US Federal Reserve’s (Fed) aggressive response to the yield of the 10-year treasury note peaking at 2.793%, meanwhile the Dollar index continues to trade around the 100-handle following a hawkish minutes report announced last week. Yesterday, Fed Policymaker Evans commented that a 50-basis points increase in rates in May needed to be considered, also suggesting it was quite likely.
Looking ahead to today, the focus will centre on the release of the US March inflation figures. Market estimates for the yearly US consumer Price Index (CPI) are at 8.4%, higher than the previous reading of 7.9%. Persistent high inflation has pressured the Fed into a more aggressive policy tightening outlook and a higher March CPI print on Tuesday will raise the odds of an aggressive interest rate hike significantly. Meanwhile, the latest Reuters poll of economists advocates consecutive 50-basis point interest rate hikes for May and June, considering the likely fresh multi-decade high US inflation at 8.3%.
Euro Remains Subdued Ahead of ECB Meeting
The Euro remained subdued against a stronger US Dollar on Monday and ahead of the European Central Bank (ECB) meeting on Thursday. The ECB has not raised its interest rates since the COVID-19 pandemic, while the Bank of England (BoE) and Fed have begun their policy tightening cycles and signalled further hikes are to follow. Markets are currently pricing in 65-basis points of ECB hikes by year-end, with the policy outlook looking less hawkish than the BOE and Fed, it will be difficult for the ECB to deliver a hawkish surprise.
Looking ahead to today, investors’ attention will turn to the German ZEW survey which will provide one of the first indications of economic activity trends for this month in the Eurozone. Later in the session, the release of Germany’s Harmonized Index of Consumer Prices (HICP) will be reviewed.
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