The latest Bank of England survey on inflation expectations recorded an increase in the 1-year expectations index to 4.3% from 3.2% previously and the highest reading since November 2008. The latest Yougov survey also reported that 5-year expectations matched record highs at 4.1%. There are strong markets expectations that the Bank of England will sanction a third successive rate increase at this week’s policy meeting, especially given the need to keep inflation expectations in check. The bank will, however, also be very uneasy over the risk of triggering a downturn in the economy. Sterling was unable to secure any significant traction during Friday with markets still fretting over the threat of deteriorating domestic economic conditions as higher energy prices bite.
CFTC data recorded an increase in short Sterling positions to over 12,000 contracts in the latest week with funds generally cautious over the outlook for the economy. Sterling remained fragile and was held just above key levels against the dollar on Monday while the Euro recovered.
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In comments on Friday, ECB council member Rehn stated that an increase in interest rates could come some week or several months after APP bond purchases end, reinforcing that the central bank will want as much flexibility as possible, maintaining uncertainty over policy developments. The Euro was unable to gain sustained support and retreated after the Wall Street open. Fears over a potential Russian use of non-conventional weapons increased later in the day with the Euro sliding against the safe haven US Dollar.
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10.00am ECB’s Elderson speech
Risk appetite was lifted ahead of the US open following reported comments from Russian President Putin that there had been positive undertones in the talks with Ukraine. The Euro moved higher, although there was a high degree of scepticism over the rhetoric and the Euro was unable to gain significant traction.
The US University of Michigan consumer confidence index edged lower to 59.7 for February from 62.8 the previous month and below market expectations of 61.4. There was only a marginal decline in the current conditions index, but with a steeper decline in the expectations component. The one-year inflation expectations index increased to 5.4% from 4.9% and the highest reading since late 1981 while the 5-year inflation expectations index held at 3.0%.
The Federal Reserve will be an important focus this week with strong expectations that there will be a 0.25% rate increase while forward guidance will be important.
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