Sterling was undermined by more vulnerable risk conditions on Tuesday, especially with equity markets declining sharply with rate increases also priced in. Expectations that the UK coronavirus restrictions would be released offered some protection to the UK currency during the day with some reports that Plan B restrictions could be scrapped in England from January 26th. Markets also continued to monitor wider political developments as Prime Minister Johnson remained under pressure with reports of a concerted move by Conservative MPs to force a no-confidence vote. The UK consumer inflation rate increased to 5.4% for December from 5.1% previously, above expectations of 5.2% and the strongest reading since March 1992. The core rate increased to 4.2% from 4.0%, maintaining pressure on the Bank of England to raise interest rates to keep inflation expectations in check. Markets will also monitor testimony to the Treasury Select Committee from Bank of England Governor Bailey.
Key Data
7.00 Consumer Price Index (YoY) (Dec) Act. 5.4% Exp. 5.2% Prev. 5.1%
14.15 Andrew Bailey Speech
The German ZEW economic confidence index strengthened sharply to 51.7 for January from 29.9 the previous month and well above consensus forecasts of 32.0. There was, however, a retreat in the current conditions component to -10.2 from -7.4 previously due to the current coronavirus restrictions. The Euro was unable to make any headway following the data and edged lower amid a firm US dollar tone and existing yield spreads. ECB council member Villeroy stated that the central bank would act if inflation proved more persistent and the Euro managed to stabilise on Wednesday with markets continuing to monitor yield trends.
Key Data
7.00 German Harmonised Index of Consumer Prices (YoY) (Dec) Act. 5.7 % Exp. 5.7% Prev. 5.7%
The New York Empire manufacturing index declined sharply to -0.7 for January from 31.9 previously. This was substantially below consensus forecasts of 25.0 and the first negative reading for 19 months. There was also a sharp decline in the new orders index to -5 from 27.1 in December while shipments secured only a marginal increase on the month. Employment increased at a slower pace on the month while inflation pressures eased slightly on the month, even though there were still notable inflation pressures in the data. Companies remained optimistic over the outlook while pricing pressures are expected to intensify. The dollar failed to retreat and posted strong gains after the Wall Street open. The US currency was boosted by a further increase in yields and strong expectations that the Federal Reserve would tighten more aggressively this year.
No Key Data