There was further evidence of a tight UK labour market which will inevitably be an important focus for the Bank of England. Sterling held a firm tone in Europe on Thursday, although there was resistance close and a limited correction as the US currency looked to stabilise after a series of losses. Sterling was hampered to some extent by concerns over a squeeze on real incomes, especially given the impact of higher energy prices with a huge increase in household energy bills scheduled to come into effect from April 1st even if the government takes action to ameliorate the pain. Sterling was unable to hold and lost ground as the US currency stabilised with a weaker tone surrounding risk appetite also curbing support while the Euro edged higher.
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ECB Vice-President de Guindos stated that inflation will not be as transitory as expected some months ago and the inflation risk is moderately on the upside. Nevertheless, he also forecast that inflation in 2023 and 2024 will be back below 2% and overall inflation pressures were under control. One possible reason for the resilience of the Euro is recent price action in the U.S. Dollar exchange rates, which were a mixed picture last week but had otherwise rallied for six months in advance of the now-in-progress normalisation of Federal Reserve (Fed) monetary policy.
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13:15 ECB’s President Lagarde Speech
The latest US retail sales data will be released on Friday with expectations that sales will be unchanged, although there has been some speculation that there will be a weaker than expected release and decline in sales for the month. There will be a risk of an erratic release on seasonal grounds which may trigger a choppy market reaction. The dollar was close to 2-month lows on Friday and position adjustment will be important later in the day. Hawkish Fed rhetoric continued with San Francisco head Daly stating that it would be quite reasonable to raise rates in March while Governor Waller stated that three or four rate hikes are a good baseline position for 2022 and that the balance sheet could start to be reduced around mid-year.
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