Sterling held a firm tone in European trading on Friday with further support from high money-market yields and expectations of a further rate hike at the March policy meeting. The UK currency failed to hold against the dollar and gradually moved lower amid a firm US dollar and weaker global equities. With risk appetite vulnerable, there was a net retreat against the US currency. CFTC data recorded a move to a small net long Sterling position in the latest week and the first long position since November. The shift will limit the scope for another round of Sterling buying unless there is a further increase in yields, but an easing of coronavirus restrictions will help underpin Pound sentiment. Sterling drew some support from a tentative recovery in risk appetite on Monday.
Key Data
9.30 Markit Services PMI (Feb) Exp. 55.5 Prev. 54.1
The Euro-zone current account surplus declined to €23bn for December from €24bn in November. For 2021 as a whole, the surplus increased to €310bn from €213bn in 2020 and equivalent to 2.6% of GDP. The data illustrates that there will be important underlying Euro support if there is a reversal of capital outflows from the Euro area and an increase in global weightings for Euro-zone assets. There were reports from ECB sources that officials are edging towards a rate hike this year to stem inflation pressure. Further reports suggested that asset purchases were likely to end in September with a potential rate hike in December which helped limit the potential for Euro selling. Euro-zone consumer confidence edged lower to -8.8 for February from -8.5 previously and weaker than expected.
Key Data
8.30 German Markit Manufacturing PMI (Feb) Exp. 59.5 Prev. 59.8
8.30 German Markit PMI Composite (Feb) Exp. 54.3 Prev. 53.8
9.00 Markit PMI Composite (Feb) Exp. 52.7 Prev. 52.3
Chicago Fed President Evans stated that policy had been wrong-footed on inflation, but may not need to become restrictive and he still expects that much of the inflation is due to supply and pandemic shocks which will ease. New York Fed President Williams stated that he expects it will be appropriate to raise rates in March, but there were no indications whether he would back a 0.25% or 0.50% rate increase. Fed rhetoric will continue to be monitored closely in the short term with overall expectations of a 0.50% rate hike fading slightly.
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