Sterling maintained a firm tone in early Europe on Tuesday with the UK currency taking advantage of a weak dollar and firm risk conditions. In this environment, there was an advance to 9-month highs against the dollar. In comments on Tuesday, Bank of England Monetary Policy Committee member Tenreyo stated that a looser monetary policy stance is needed to meet the inflation target. She added that with current rates there would be a significant inflation undershoot. The comments maintained a very dovish policy stance, but the impact was offset by the fact that she will be leaving the bank in July. Markets will be monitoring a potential announcement of Tenreyo’s successor. There were also expectations that other committee members would maintain a more hawkish policy stance. Bank chief economist Pill stated that there was still a lot of tightening in the pipeline given the policy lags. He also expects headline inflation to fall significantly but warned over the risk of persistence of domestically-generated inflation. The May rate decision would be dependent on the forecast analysis and data flow.
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The Euro maintained a strong tone in early Europe on Tuesday with a further test of resistance against the dollar. The latest German trade data was stronger than expected with an increase in exports and imports of over 4.0% for February. ECB council member Makhlouf stated that the policy rate will need to be kept at a restrictive level to dampen demand. He also commented that short-term volatility in financial markets does not translate into risks for the macroeconomic outlook. Markets overall continued to price in a further rate increase of close to 50 basis points at the May policy meeting. The Euro initially strengthened to highs against the dollar before fading to trade lower around the New York open.
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US economic conditions remained a key focus. The JOLTS data recorded a decline in job openings to 9.9mn for February and well below consensus forecasts of 10.40mn while the January figure was revised down to 10.56mn from the original reading of 10.82mn. The decline in job openings triggered fresh speculation of a significant easing in labour market conditions. In response, there were fresh gains for Treasuries with the 10-year yield dipping below 3.40%. There was also a shift in interest rate expectations with markets now placing close to a 60% chance that the Fed will decide against raising rates at the May policy meeting.
Key Data
13.15 ADP Employment Change (Mar) Exp. 200K Prev. 242K