Sterling held firm at the European open on Monday with a further test of resistance against the US dollar. Although UK equities recovered quickly from opening losses, the overall risk tone was slightly more cautious with US futures moving lower and this limited the scope for Sterling buying. Sterling gradually lost ground into the New York open with markets also warry over chasing the UK currency higher ahead of Thursday’s Bank of England policy decision. The IMF warned that the UK economy will contract this year, although recession has already been priced in to an important extent and the report was seen as slightly out-dated. Risk appetite remained less confident on Tuesday.
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The latest year-on-year Spanish inflation data recorded a small increase to 5.8% from 5.7% the previous month and well above consensus forecasts of 4.9%. The stronger than expected data triggered some fresh concerns over Euro-zone inflation trends and also sparked speculation that the ECB would need to maintain a hawkish policy stance. The German inflation data was scheduled to be released on Tuesday, but has been delayed until next week. The Euro-Zone data will go ahead on Wednesday with an estimate for the German data and the release will be important for ECB expectations. German GDP was reported as a contraction of 0.2% for the fourth quarter of 2022 and compared with expectations of no change. Annual growth was held to 0.5% from 1.3% previously and the data triggered fresh speculation that the German economy could register a technical recession. Euro-Zone industrial and services-sector confidence strengthened in January with both figure beating expectations. The overall business and consumer confidence index strengthened to 99.9 for January from 97.1 the previous month and comfortably above market expectations of 97.0.
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9.00 ECB Bank Lending Survey
10.00 Gross Domestic Product (QoQ) (Q4) Exp. 0% Prev. 0.3%
10.00 Gross Domestic Product (YoY) (Q4) Exp. 1.8% Prev. 2.3%
US Treasuries dipped after the European open on Monday with the 10-year yield moving above the 3.50% and higher yields provided an element of dollar support. The US currency was able to move although relatively narrow ranges prevailed. The Dallas Fed manufacturing index recovered to -8.4 for January from -20 the previous month, but there was also a slight easing of inflation pressures as the pace of wages growth also moderated to a limited extent.
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