January 12, 2022

Will PM Johnson’s Future Lead to Sterling Uncertainty?

Yesterday was a quiet day in the UK with no major data releases. The Sterling made gains against the US Dollar following Federal Reserve (Fed) Chairman’s speech which took a less hawkish tone. Meanwhile, underlying Sterling sentiments held firm on higher money-market yields and hope that COVID-19 cases in the UK would soon peak.  

The ongoing difficulties surrounding Prime Minister Johnson and said lockdown garden parties had limited impact, but political developments will be watched closely; particularly at the PMQ today. According to Betfair, PM Johnson is showing odds of 8/11 to be replaced this year. So far, the impact on the Sterling has been limited but this could potentially increase.

Looking to the day ahead, Bank of England’s (BoE) Cunliffe is scheduled to talk about crypto finance and may not touch on near-term economic developments including the outlook for interest rates. Overnight there will be another house price survey release – this time from the RICS.

Markets Eye US CPI Inflation Data for Short-Term Direction

The US Dollar weakened on Tuesday as Federal Open Market Committee (FOMC) Chairman Jerome Powell adopted a cautious approach to the Fed’s policy outlook. During the comments before the Senate, Powell signalled that price pressures are expected to last well into 2022 and the Fed’s focus remains primarily on inflation over full employment. In a less hawkish tone than the recently released December minutes report, Powell also commented that the Fed would potentially need several meetings to devise a plan on how it would reduce its balance sheet on the path to policy normalisation.

Today’s latest release of Decembers’ inflation figures will provide markets with fresh insight into the economy and the direction of monetary policy. The core inflation rate – which excludes food and energy prices – is expected to have risen to 5.4% in December – an increase from 4.9% month-on-month. 

Meanwhile, headline inflation is expected to have reached 7%. A print above expectations, particularly for the core figure is likely to further increase market expectations of a March rate hike and lend support to the Dollar.

Elsewhere today, the Fed is due to release its Beige Book Report. Investors will be looking for further signs of inflationary pressures, particularly within the labour market where wage inflation pressures are being passed through into prices.

European Inflation on the Retreat?

Joachim Nagel, Germany’s new Bundesbank Chief, urged the European Central Bank (ECB) to “be on the alert” and get a grip on surging European inflation during the virtual ceremony marking the change in the office of the German Central Bank yesterday. He noted the discontent in Germany over rising inflation and that it’s at the highest it’s been since June 1992 at 5.3%, and years of negative interest rates. Nagel also commented that the current 5% inflation figure isn’t entirely due to transitory or temporary factors and that the inflation outlook within the single bloc remains uncertain.

In contrast, ECB Economist Philip Lane commented that inflation will retreat below the Central Bank’s 2% inflation target in 2023 and 2024. This view is complemented by the Chief European Economist at Goldman Sachs who believes that European inflation has already passed its peak at 4.6% in Q42021, retreating to 3.9% in the opening quarter of 2022. 

Looking ahead to today, it’s a very baron macro-economic calendar for the Eurozone to provide much direction for the Euro.

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