Sterling posted a limited net advance ahead of Tuesday’s New York open with underlying support on yield grounds with expectations that the Bank of England rate hikes would underpin the UK currency as global investors switch funds towards currencies where nominal interest rates are expected to increase over the next few months. Overall risk conditions held steady during the month with Wall Street indices posting limited net gains into the European close which curbed any potential Sterling selling. Markets will be monitoring comments from Bank of England chief economist Pill on Wednesday for further guidance on interest rates with Sterling holding a firm tone in early Europe as global equities made headway.
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Markets continued to monitor ECB rhetoric. Council member de Cos stated that recent inflation data has shown a surprising upwards trend, although there is still a high degree of uncertainty over the outlook and inflation is not likely to remain above 2% over the medium term. Markets looked at Italian yield trends closely during the day with concerns that any widening of yield spreads would undermine the Euro-zone outlook. There was also speculation that any further widening of peripheral spreads would prevent aggressive policy action by the ECB, especially given the need to avoid a tightening of financial conditions. Overall, the Euro consolidated at the European close as narrow ranges prevailed. After the European close, ECB Council member Villeroy stated that the market reaction to the ECB may have been too strong which suggests further unease over the market moves seen since last week’s meeting.
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The US NFIB small-business confidence index declined to an 11-month low of 97.1 for January from 98.9 the previous month with only one of the indicators registering a monthly improvement. There was still evidence of a very tight labour market while a number of companies reported that inflation was the biggest problem. In addition, the number of companies increasing selling prices hit the highest level since 1974 which will maintain concerns over underlying inflation trends within the economy. The US trade deficit widened to $80.7bn for December from $79.3bn the previous month, although this was below consensus forecasts of $83.0bn. For 2021 as a whole, the deficit widened to a record $859bn from $677bn the previous year and was equivalent to 3.7% of GDP.
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