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UK Data Reinforces Inflation Problems

The UK PMI services index decreased slightly to 60.5 from the flash reading of 60.8, but this was still the highest reading for eight months. In addition, costs increased at the second-fastest rate in the past 25 years whilst service prices increased at the strongest rate on record. 

Sterling remains susceptible to risk trends based on ongoing geopolitical issues. The pound has come under some pressure this week but is showing much better resilience compared to other European currencies like the Euro and Swedish Krona. This is partly because the market continues to price in five 25-basis point rate hikes by the Bank of England (BoE) in 2022 whilst not being as reliant on Russian gas. As a result, GBPEUR continues to trade at the highest level since Brexit.

There is no major data release for the UK, but Sterling will remain fragile to risk trends.

US Jobs Market Report Set to Provide Guidance on Monetary Policy Outlook

Financial markets remained risk-averse during Thursday’s trading as safe-haven flows once again took control of markets due to continued geopolitical and economic uncertainties. Overnight reports stated that Russia has attacked Ukraine’s largest nuclear power station which triggered another risk-off move in overnight markets. The US Dollar Index continued to remain elevated at its highest level since May 2020 and has settled near the 98.00 handles. Elsewhere yesterday, the Dollar remained supported on Federal Reserve (Fed) Chair Jay Powell’s comments during his second day of reporting to congress. Powell commented that he couldn’t rule out a 50-basis point hike in March if inflationary pressures remain.

Looking ahead to today, US Non-Farm Payrolls are expected to have added 438,000 new jobs in February, following on from the 467,000 added in January. Alongside the headline jobs number, the unemployment rate is expected to have fallen by 0.1% to 3.9%. The annual wage growth figure is expected at 5.8%. This is the last jobs report before the Fed’s next policy meeting in March where they are expected to begin hiking interest rates.

Euro Hits Multiyear Low

In an early data release on Friday, data showed a 1.5% gain for Germany which was a recovery in monthly Eurozone retail sales for January. The rebound in the figure highlighted a sharp turnaround following a drop in December. The recovery was mostly attributed to improved conditions as the impact of the Omicron variant reduced. Persistent inflation rates do however remain a concern over the outlook for consumers’ real spending power.

The single currency fell to its lowest level against Sterling since Brexit and its lowest level against the US Dollar since May 2020 based on the risk trends, interest rate divergence and greater exposure to Russian energy.

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