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Will Central Bankers Provide Direction as Geopolitical Risk Escalate?

Last week, much of the news was dominated by geopolitical developments with the deteriorating situation in Ukraine. Many governments have condemned the Russian incursions and promised to act. What has been described as ‘severe’ sanctions have already been announced by the UK, US, the EU, and others. A by-product of the conflict has seen the rise in the price of oil to circa $100 a barrel. To put this into perspective, this is over 60% higher than this time last year. In an already high inflation environment, it will put further pressure on both central banks and governments to control inflation. As a result of risk aversion in the market, we saw the US Dollar strengthen significantly against a basket of currencies.

In the meantime, there were serval speakers from the Bank of England who attempted to cool interest rate expectations. Bank of England (BoE) Governor Bailey stated that second-round effects very clearly pose a risk to inflation. However, he also stated that markets should not get carried away about the likely scale of interest rate increases. This has been a common theme over the past couple of weeks. In addition, BoE Chief Economist Pill stated inflation was uncomfortably high, but he added that the Central Bank would seek to bring fast-rising inflation down in a measured way that doesn’t disturb the rest of the economy. However, the tone was not echoed across the pond as Federal Reserve (Fed) Governor Michelle Bowman indicated that a 50-basis point at the Fed March meeting could be a possibility. On Friday, the probability of a 50-basis point hike was circa 20%; geopolitical tensions could impact this moving forward.

Sterling Vulnerable to Risk Aversion. Market to Focus on Central Banker Rhetoric

Sterling fell against the US Dollar last week on the back of risk aversion as a by-product of the escalation in geopolitical tension. Recently we have seen BoE members downplay the pace that the central bank may raise the base rate. Monetary Policy Committee (MPC) Member Saunders is due to speak at the University of East Anglia on Tuesday. The market will watch his rhetoric carefully for clues ahead of the Central Bank’s monetary policy meeting on 17March as he is one of the members that voted for a 50-basis point hike at the last meeting. Besides Saunders, there are other BoE members speaking throughout the week. In terms of economic data, particular interest will be on the PMI Services on Thursday and PMI Construction on Friday.

Will Data Provide Clues on Future US Policy?

The direction of the US Dollar against a basket of currencies will be driven by risk-based moves surrounding the Russia-Ukraine situation. The all-important labour data is released on Friday with the Non-Farm Payrolls set for release. January employment surprised significantly on the upside given concerns that the elevated level of COVID-19 cases was constraining economic growth. Another strong reading of circa 400k new jobs is expected and could strengthen the case for a 50-basis point hike on 16 March. However, probably of most interest will be Federal Reserve (Fed) Chair Powell’s testimony to Congressional Committees (Wednesday & Thursday). This will be his last opportunity to send a signal on the Fed’s policy intentions before the silent period ahead of the 15-16 March policy meeting.

Will Eurozone Inflation Continue to Nudge Higher?

With the conflict on Europe’s doorstep, it is probable that the bulk of data releases may have little impact. In terms of key releases for the region will be Wednesday’s data set as unemployment and inflation data are set for release. Both Spanish and German unemployment numbers are expected to have fallen amidst the dissipation of omicron. However, against the forecast of inflation being transitory is the Consumer Price Index which is expected to have risen from 5.1% to 5.4%. Given the rise in oil prices in the last week this may still push higher in the months to come. The direction of the single currency is however going to be largely driven by geopolitical tensions.

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