Sterling edged higher ahead of Wednesday’s New York open although it was unable to make a challenge against the dollar. Bank of England chief economist Pill stated that it’s better to adopt a measured approach to monetary policy as rapid moves can give misleading messages and amplify volatility. He also noted that it had been a close call between a 0.25% and 0.50% rate hike this month and that he would not want to exclude rate adjustments of more than 25 basis points. Wage trends will be important and noted that a tighter than expected monetary policy might be needed if there is evidence of second-round effects in wage and cost developments. The overall message, however, was that gradual rate increases will be preferred over the next few months. Sterling was unable to gain further support from Pill’s comments with reservations over the Brexit situation also a significant element as Prime Minister Johnson repeated the threat to suspend Article 16 if there was no headway on the Northern Ireland protocol. Latest data indicated that the labour market is still tight and the RICS house-price survey recorded an increase to 74 from 70 previously amid further supply difficulties.
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17.00 Andrew Bailey Speech
The German trade surplus narrowed to €6.8bn for December from €10.8bn the previous month with a further strong increase in imports on the month. The Euro edged higher into the New York open with markets continuing to assess underlying monetary policy developments. Bundesbank head Nagel stated that he would advocate more to normalise monetary policy if the inflation picture does not change by March. He added that the costs of acting too late are significantly higher than acting too early. The overall commentary was notably more hawkish than comments from other key ECB officials over the past few days, but there will inevitably be a wide divergence in views within the council as the internal debate continues. ECB council member Schnabel commented that the central bank will act accordingly if it believes that inflation will remain above target over the medium term.
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The dollar edged lower after the New York open with significant losses against commodity prices as equity markets posted strong gains. Narrow ranges prevailed ahead of Thursday’s US CPI inflation data. Markets expect the headline rate to increase to a fresh 39-year high of 7.3% from 7.0% with some scope for a weaker dollar if the rate is below expectations. A stronger than expected release would reinforce speculation that the Federal Reserve would tighten more aggressively at the March meeting with choppy trading likely after the release. Atlanta Fed President Bostic stated that he hoped inflation would start to decline soon, although he also commented that he was leaning towards four rate hikes for this year compared with his previous assumption of three increases with inflation this year likely to be around 3%. Cleveland Fed President Mester said that she expects inflation to moderate based on the central bank taking appropriate action and that conditions warrant a balance sheet reduction soon and at a faster pace. She also commented that the impact of Omicron is likely to be minor and transitory.
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13.30 Consumer Price Index ex Food & Energy (MoM) (Jan) Exp. 0.5% Prev. 0.6%
13.30 Consumer Price Index ex Food & Energy (YoY) (Jan) Exp. 5.9% Prev. 5.5%
13.30 Consumer Price Index (YoY) (Jan) Exp. 7.3% Prev. 7.0%