Sterling was unable to make further initial gains following the latest UK inflation data, but the currency held a firm tone, especially with stronger expectations that the Bank of England would sanction a further interest rate increase at the February policy meeting. The UK currency gained an element of support from a firmer tone surrounding risk appetite even though there was still significant caution. Although there was a strong focus on political drama surrounding Prime Minister Johnson, the announcement that coronavirus restrictions in England would be eased provided some support for UK markets and UK equities were resilient which maintained expectations of investment inflows. In testimony to Treasury Select Committee, Bank of England Governor Bailey stated that the labour market is very tight and that the bank was seeing some evidence of second-round inflation effects. Bailey also stated that inflation would take longer than expected to decline than had been expected two months ago, especially with concerns that energy prices would not start to decline until the second half of 2023. Sterling failed to make further headway into the European close but held against the dollar on expectations of a February rate hike.
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The Euro-zone current account surplus widened to €24bn for November from €19bn the previous month with a 12-month surplus of €320bn and 2.7% of GDP. There were, however, further portfolio outflows from the Euro-zone with a reversal in these flows needed to provide longer-term Euro support. The Euro was resilient ahead of Wednesday’s New York open with a slight net gain as commodity currencies posted an advance against the US currency. The German 10-year bond yield also moved above 0.0% for the first time since May 2019 which provided an element of support for the single currency as markets also considered the potential for a less accommodative ECB policy within the next few months. Markets will continue to monitor rhetoric from ECB officials closely with scope for the bank to push back against an increase in money-market rates.
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US housing starts increased to an annual rate of 1.70mn for December from 1.68mn previously and above consensus forecasts of 1.65mn. Building permits increased strongly to 1.87mn from 1.72mn and above expectations of 1.70mn previously. US Treasuries secured some respite in early US trading with the 10-year yield retreating from 2-year highs. There were net gains in equities which helped underpin risk appetite. The dollar edged lower as yields declined. Relatively narrow ranges prevailed during the US session with the dollar unable to gain significant traction.
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