Sterling edged higher after the UK labour-market data and also posted gains as risk appetite improved. The UK currency, however, was unable to make more than slight headway and drifted lower into the New York open with further Bank of England tightening already priced in. Sterling found support against the dollar and was unchanged into the European close, but the overall performance was unconvincing given a net improvement in risk conditions. The headline UK inflation rate increased to a 29-year high of 5.5% for January from 5.4% previously and slightly above consensus forecasts of 5.4%. The core rate also increased to 4.4% from 4.2%. Immediate market reaction was muted.
Key Data
7.00 Consumer Price Index (YoY) (Jan) Act. 5.5% Exp. 5.4% Prev. 5.4%
The German ZEW investor sentiment index edged higher to 54.3 for February from 51.7 previously, although slightly below consensus forecasts while there was also a limited improvement in the current conditions component. The Euro posted net gains on reports that Russia was removing some troops from the Ukraine border. Euro-zone GDP increased 0.3% for the fourth quarter of 2021 with an annual increase of 4.6% with both figures in line with market expectations. ECB council member Schnabel stated that there was an argument for ending asset purchases and that underlying inflation would have been at 2% last year if housing costs had been included. The Euro held firm in early Europe on Wednesday amid expectations of a more hawkish ECB stance and reduced Ukraine fears.
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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.
Key Data
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%