After the flurry of rhetoric from Bank of England officials last week, there were no significant domestic developments on Monday and global developments tended to dominate. Risk appetite attempted to recover during the day which provided an element of support for the UK currency. Sterling edged back against the dollar while the Euro recovered slightly from intra-day lows. Comments from Bank of England members Saunders and Mann will be monitored closely on Tuesday, especially with further upward pressure on inflation. The most likely outcome is that central bank will opt for a gradualist approach at this month’s meeting, especially given geo-political concerns, potentially dampening Sterling support. The UK currency traded higher against the dollar on Tuesday and was hoping to continue this move going into Tuesday.
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GBP Markit Manufacturing PMI Prev 57.3 Exp 57.3
The Euro was able to stabilise in early Europe on Monday with asset prices resisting further selling pressure. Diplomatic and political pressures remained intense during the day as Western countries announced further sanctions against Russia. Switzerland announced that it would impose sanctions and match action taken by the EU which would further tighten pressure on Russia. There were some expectations of increased global dollar demand as financial sanctions bite and there were stresses in funding markets. In retaliation, Russia announced that its airspace would be closed to flights from 27 countries. There was a further limited shift in interest-rate futures during the day with money markets pricing in 30 basis points of tightening by the end of 2022 compared with around 35 basis points at the end of last week. The first move to raise rates is also now seen in September compared with June previously.
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ECB President Lagarde Speech
The potential for a 50 basis-point increase in the Fed funds rate at the March meeting also declined to around 10% from 20% last week. Atlanta Fed President Bostic stated that he favoured a 25 basis-point increase this month, but also stated that he would have to look at a 50 basis-point increase if the data persists at elevated levels. Testimony from Fed Chair Powell will be monitored very closely on Wednesday for further hints on the March decision. Ukraine developments focussed on financial developments and overall yield spreads underpinned the dollar in early Europe while commodity currencies maintained a firm underlying tone which dampened dollar support to some extent.
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US ISM Manufacturing PMI Prev 57.6 Exp 58