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Jamie Jemmeson
April 7, 2022

UK Confidence Continues to Slide

Sterling Remains Under Pressure Amidst Risk Off Tone

Sterling’s fragility remains following an increased bout of risk aversion as there has been an escalation in the sanction on Russia following the latest atrocities. The UK PMI construction index was unchanged at a 9-month high. Cost pressures remained intense with input price costs increasing at the fastest rate for six months. Overall business optimism dipped to a 17-month low, matching the decline seen in both the manufacturing and services sectors.

The recent downgrades in confidence and forward-looking data will be a concern for the Bank of England (BoE) as this will add another layer of complexity to the bank’s ability to raise interest rates.

It is a quiet day in terms of economic data, but Sterling will continue to be driven by risk trends.

US Dollar Continues to Climb on Hawkish Minutes Report

The Dollar continued its recent climb on Wednesday following the release of the Fed’s Minutes report from the March meeting, reminding investors of the aggressive stance recently adopted by the Central bank. The report revealed that central bank Policymakers are determined to move the monetary policy to neutral expeditiously and that a move to a tighter policy could be warranted. The report also revealed that several officials would have preferred a 50-basis point hike at the March meeting, rather than the confirmed 25-basis point lift. Elsewhere on Wednesday, the Dollar continued to gain support as Philadelphia Fed President and Federal Open Market Committee (FOMC) member, Patrick Harker, commented that he would support methodically raising interest rates back to neutral, at around 2.5%. He also said that he doesn’t see high inflation going away any time soon and that high energy prices will be here for some time.

Markets will hear from several Fed officials on Thursday for further clues over the Fed’s timings of policy tightening and particularly for further clues over a 50-basis point hike in May. Elsewhere, weekly initial jobless claims data is set for release.

Euro Subdued on Dovish Comments 

The Euro remained subdued during Wednesday’s trading and continued to test a fresh two-year low against the US Dollar. European Central Bank (ECB) Chief Economist Philip Lane commented that it is important not to overreact to the recent surge in inflation, triggered by supply chain issues and higher energy prices. He added that policymakers cannot respond to the current high inflation rates as its orientation is towards the medium-term and that officials will do whatever it takes to meet the central bank’s 2.0% inflation target. 

Looking ahead to today, the focus will centre on the ECB meeting minutes. Money markets are currently pricing in a 55-basis point tightening of ECB tightening by year-end. On the economic calendar today, investors will review the release of the latest release of EU Retail Sales data.

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