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UK Growth Forecast Cut

UK inflation rose to a 30-year high as prices rose by 6.2% from 5.5% in the 12 months to February as fuel, energy and food costs surged. The outturn was stronger than both the market consensus and our forecast for a rise to 6.0%. Core CPI inflation, excluding food and energy, increased to 5.2% from 4.4%. Prices are rising faster than wages and the Bank of England (BoE) thinks it could hit double digits this year.

The main focus of the day was the budget. In his Spring Statement, Chancellor Sunak announced a 5p per litre reduction in fuel duty and also announced a substantial increase in the National Insurance threshold of £3,000, but there were no other major measures to alleviate the immediate stresses on disposable income as the cost-of-living crisis continues. In the meantime, the OBR downgraded the 2022 outlook substantially with GDP seen increasing 3.8% compared with 6.0% previously. For the following two years, forecasts are now 1.8% and 2.1% respectively. Given high inflation, the OBR also stated that real living standards are set to decline to 2.3% for 2022/23, the sharpest decline on record.

Looking to the day ahead, we have some key economic releases from the UK in the form of the PMI manufacturing and service sector data. These will articulate the pace of expansion and whether it is still accelerating. In addition, we have the CBI realised sales numbers which will analyse consumer spending.

US Greenback Firmer on Hawkish Fed Comments

The US Dollar remained elevated against several major trading pairs on Wednesday after Federal Reserve (Fed) officials indicated they are ready to take more aggressive policy action to tame rising inflation, including a possible 50-basis point hike in May. Fed officials, including San Francisco Fed President Mary Daly, noted for being more cautious over tightening rates, commented that she supports a larger rate hike if required to combat inflation. Elsewhere yesterday it was reported that new home sales fell 2% from a month earlier, following a revised 8.4% drop in the previous month.

Looking ahead to today, the Dollar remains well supported ahead of President Biden attending a NATO summit to discuss Ukraine and where reports suggest that the US and the EU members are close to a deal to lower Europe’s dependence on Russian energy. Elsewhere, several central bank officials will speak today. Fed policymakers are expected to continue to point to the likelihood of several more US interest rate hikes this year and investors will be looking for fresh clues of the strength of support for a 50-basis point interest rate rise at the next policy meeting. The US economic calendar will also feature February Durable Goods Orders and the weekly Initial Jobless Claims data.

EU Consumer Confidence Falls to 22-Month Low

Yesterday’s stand out data release reported that the consumer confidence indicator in the Eurozone fell sharply by 9.9 points on a month-on-month basis to -18.7 in March. The figure fell short of market expectations of a drop to -12.9 and was the lowest reading going back to May 2020. The drop in confidence was attributed to geopolitical uncertainty and pressures overall. The Euro ended the day in negative territory against both the US Dollar and Pound.

Key data releases today include the release of HIS Markit PMI data for March which will provide one of the first indications of the impact of the Ukrainian crisis across the UK, US Germany, and Eurozone economies. Elsewhere, scheduled ECB member speeches throughout the day will provide short term direction for the single currency.

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