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UK Inflation Continues to Soar

Yesterday we saw Sterling supported against the US Dollar following the UK labour data. UK unemployment rates held at 4.1% in the three months to December, in line with expectations. There was a further 108,000 increase in employment for January to a fresh record high while headline average earnings increased from 4.2% to 4.3%. Sterling lost ground against the Euro following reports that Russia was removing some of its troops from the Ukrainian border. However, caution remains about further escalation due to the sheer numbers that remain on the border.

This morning we have had the Consumer Price Index (CPI) show that inflation surged by 5.5% in the 12 months to January, up from 5.4% in December according to the Office for National Statistics (ONS). Inflation is now outpacing wage growth as energy, fuel and food costs continue to rise, squeezing household budgets. Inflation is expected to grow to 7% in April with the removal of the energy cap. Pressure remains on the central bank to contain inflation, but it is a balancing act, and it is likely that consumer spending and borrowing will slow as inflation continues to escalate and squeeze household budgets.

Dollar Softens as Risk Appetite Improves

Yesterday saw global stock markets rebound following a spell of increased safe-haven demand during the previous trading session and triggered by rising geopolitical tensions. All three major US stock markets rallied higher following three days of losses, as fears of an imminent invasion of Ukraine subsided. In turn, safe-have demand for the greenback subsided as the Dollar index fell from Monday’s highs.

President Putin yesterday told German chancellor Olaf Scholtz that Russia is prepared to negotiate with western partners. The comments calmed financial markets as US Treasury yields steadied. Meanwhile, the Dollar’s losses were limited as several Federal Reserve (Fed) officials are scheduled to speak this week, offering fresh clues around the timing and pace of rate hikes, set to begin in March. The Federal Open Market Committee (FOMC) January minutes report is set for release today, providing investors with further insights around policymakers economic and monetary projections.

Looking ahead to today, markets are set for a busier day of economic releases. Focus will centre on the release of the FOMC’s January minutes report later in the session. Meanwhile, January’s Retail sales and Industrial production releases will offer direction for the Dollar, however, investors will continue to monitor Russia-Ukraine with ongoing tensions likely to dominate financial markets.

Euro Strengthens as Russia Withdraw Some of its Troops

The German ZEW investor sentiment index rose to 54.3 in February from 51.7 the previous month, although marginally below the consensus forecast, as expectations surrounding a further easing of COVID-19 restrictions increased. The Current Conditions sub-index also increased, to -8.1 from -10.2 previously but undershooting the -6.0 expected reading.

Eurozone GDP increased by 0.3% for the fourth quarter of 2021 compared to the previous three months. With an annual increase of 4.6%, both figures reading is aligned with market forecasts. Additionally, Flash Unemployment in the Eurozone recovered to its pre-pandemic level, increasing 2.1% year on year to hit 161.8m for the fourth quarter of 2021.

Looking ahead at today, there is no significant data releases to provide much direction for the single currency. Market’s will continue to monitor the possible de-escalation surrounding the Ukrainian border which could provide some confidence to financial markets.

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