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Jamie Jemmeson
January 19, 2022

UK Inflation Raises To 30-Year High

UK Retail Sale Post Positive Reading. Can This Continue?

Yesterday we saw Sterling lose ground against the US Dollar following speculation of a larger rate hike. However, Sterling remained solid as expectations that the UK COVID-19 restrictions would be lifted offered some protection to the currency.

In the meantime, PM Johnson faces several challenges as news circulated regarding what is being dubbed the “Pork Pie Plot” where circa 20 Conservative MP’s who were elected in 2019 discussed submitting letters of no confidence. This has caused further division amongst the party. Markets also continued to monitor wider political developments as PM Johnson remained under pressure with reports of a concerted move by Conservative MPs to force a no-confidence vote. UK inflation rate increased to 5.4% for December up from 5.1% previously, above expectations of 5.2% and the strongest reading since March 1992. The core rate increased from 4.0% to 4.2%, maintaining pressure on the Bank of England (BoE) to raise interest rates to keep inflation expectations in check. The market will monitor the testimony of BoE Bailey today before the Treasury Select Committee. The market will be looking for clues on the direction and more importantly, the pace of interest rises this year. 

Greenback Supported As Risk-Off Mood Continues Across Financial Markets

The US Dollar benefited from safe-haven flows on Tuesday amid rising Russia-Ukraine tensions. Fears of rising global inflation rates continued to influence a risk-off approach across financial markets on Tuesday. US Treasury yields moved higher for the second day with the 10-year note hitting 1.89%, underpinning the currency against most major pairs. The Federal Open Market Committee (FOMC) are due to meet on 25 and 26 January and although it is not expected to move on rates at this meeting, recent hawkish commentary from the December minutes report has led to speculation over a series of rate hikes in 2022. While a quarter-point increase is still the most likely scenario in March, swap markets are now contemplating a 50 basis points move by the end of March. Speculation of a ‘super hike’ may draw further support for the dollar leading up to the Federal Reserve’s March meeting.

Elsewhere, oil prices continue to appreciate, hitting an 8-year high yesterday which added further support to the Dollar.

Looking ahead to today, markets will review Building Permits and Housing Stats data for December. Expectations are for a modest fall from November in line with recent data releases which have been reported largely in line with expectations.

German Sentiment Increases Whilst Adaptive Approach to Inflation Sounded

The German ZEW Economic Sentiment Index increased significantly to 51.7 versus a forecast of 32.1 and a previous December reading of 29.9. However, the Current Conditions sub-index declined to -10.2 in January versus a previous fall of -7.4. The Eurozone ZEW Economic Sentiment also surprised to the upside, reading at 49.4 in January versus a previous reading of 26.8 and a consensus of 29.2. The direction of the Euro remained relatively muted following the surprise reading with the single currency remaining under pressure from the US Dollar.

European Central Bank (ECB) policymaker, Francois Villeroy de Galhau, stated yesterday that the ECB will adopt monetary policy quicker if inflation persists for longer than expected. The current view from several policymakers is that European inflation is expected to ease over the current quarterback below the 2% inflation target set by the central bank.

Looking ahead at today it is another baron day for key Eurozone macro-economic data releases. German Final CPI month-on-month figures have already been released this morning. They read unchanged and in line with expectations at 0.5%. The only other release today is the European Current Account reading, the expectation is for the balance to read 20.3billion versus a previous of 18.1billion.

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