Sterling pushed higher against the dollar in early Europe on Tuesday, but was unable to sustain the move and retreated into the New York open. Underlying Sterling sentiment held firm on higher money-market yields and hopes that UK coronavirus cases are close to peaking. There has, however, been a strong advance since the beginning of the year and the currency struggled to gain further traction with higher yields seen as priced in. The on-going difficulties surrounding Prime Minister Johnson had only a limited impact, but political developments will be watched closely amid frenetic speculation. Global risk appetite held steady on Wednesday which helped underpin Sterling and overall currency sentiment held firm.
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ECB President Lagarde stated on Tuesday that the bank takes concerns over rising prices very seriously and that people can trust that our commitment to price stability is unwavering. New Bundesbank head Nagel also stated that the inflation surge is not entirely due to temporary factors and that the outlook is extraordinarily uncertain. ECB chief economist Lane, however, commented that inflation would retreat later this year and be below the central bank’s 2% target in 2023 and 2024. He added that there was no sign of core inflation speeding up in wages settlements and that a rate increase in 2022 remains very improbable.
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The US NFIB small-business confidence index strengthened to 98.9 for December from 98.4 previously and slightly above expectations while there was evidence of a marginal decline in inflation pressures. Fed Chair Powell stated that the economy no longer requires an extremely accommodative policy and the central bank will return to a more normal policy with inflationary pressures likely to persist until the middle of this year. There were further expectations of a near-term rate hike in March and at least three increases in 2022. He added that the Fed will shrink the balance sheet more quickly than last time, although he still expressed caution with comments that a reduction in the balance sheet might start this year. The comments were slightly less hawkish than had been expected following the Fed minutes released last week and the dollar lost ground. The latest CPI data will be released on Wednesday and the dollar may strengthen if the headline rate is above 7.0% while a weaker release would curb US support.
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13.30 Consumer Price Index ex Food & Energy (MoM) (Dec) Exp. 0.5% Prev. 0.5%
13.30 Consumer Price Index ex Food & Energy (YoY) (Dec) Exp. 5.4% Prev. 4.9%