Sterling held a firm tone in early Europe on Wednesday but was unable to secure further traction. There was speculation that higher yields have already been priced in and markets were also monitoring political developments closely with Prime Minister remaining under pressure as he was forced to apologise in the House of Commons. International developments dominated during the day and overall global risk appetite held firm during the day with strong advances in oil and commodity currencies helping to underpin Sterling sentiment. Sterling pushed to fresh 2-month highs against the dollar after the US inflation data but the UK currency was unable to make further headway against the Euro as the single currency traded lower. Markets will continue to monitor political developments, although yield and risk trends are likely to dominate. Markets will be monitoring Bank of England rhetoric very closely in the short term ahead of February’s meeting.
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Eurozone industrial production increased 2.3% for November with a year-on-year decline of 1.5%. ECB council member Villeroy stated that we are very near to the peak in inflation, although markets remained unconvinced over the central bank commentary on inflation. There was little impact from the data with caution prevailing ahead of the US inflation data while speculation over a shift in ECB policies this year continued to curb potential Euro selling.
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13:15 ECB’sPresiden Lagarge Speech
US consumer prices increased 0.5% for December and marginally above consensus forecasts. The year-on-year inflation rate increased to 7.0% from 6.8% which was in line with expectations and the highest figure since 1982. Energy prices declined slightly on the month with a 29.3% increase over the year. Underlying prices increased 0.6% on the month compared with expectations of 0.5% with the year-on-year rate increasing to 5.5% from 4.9%. This was slightly above market expectations of 5.4% and the highest rate since 1991. Used car and truck prices increased 3.5% on the month with a 37.3% annual increase while apparel prices increased 5.8% over the year. Although the data overall was marginally above consensus forecasts, the dollar failed to gain any traction and selling pressure gradually increased into the European close. The Euro strengthened to 8-week highs as commodity currencies also posted strong gains.
The Fed’s Beige Book reported a modest expansion of activity across all districts while growth expectations moderated slightly. There was some evidence that bottlenecks were easing, but there was still strong upward pressure on wages as labour markets remained very tight. The dollar was unable to regain ground on Thursday and retreated to fresh 2-month lows with the Euro in early Europe as commodity currencies held firm.
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13:30 US Retail Sales (MoM) (Dec) Forecast 0% Previous 0.3%
15:00 US Michigan Consumer Sentiment Index (Jan) Forecast 70 Previous 70.6