Sterling posted further gains following the latest inflation data released on Wednesday. The higher than expected readings for headline and core inflation triggered a fresh increase in interest rate expectations. The chances of a rate hike to 4.50% at the May meeting are now seen at close to 100% while markets also now expect that rates will peak at 5.00% compared with around 4.85% ahead of the data.
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The Euro-Zone current account surplus widened to EUR24.3bn for February from EUR17.0bn the previous month and well above expectations of EUR6.7bn. Although there was a substantial deficit in the second half of 2022, the Euro-Zone recorded a 12-month surplus of EUR114bn and equivalent to 0.9% of GDP. ECB council member Lane stated that if baseline projections persists, it will be appropriate to increase interest rates further. There was still an important element of uncertainty whether there would be a 25 or 50 basis-point rate hike next month with markets pricing in around a 40% chance of a 50 basis-point hike. The Euro still lost ground after the European open with the dollar securing net gains, especially with weaker equities underpinning the US currency.
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The US Dollar (USD) was boosted on Wednesday by market bets on additional policy tightening from the Fed. The safe-haven ‘Greenback’ also benefitted from a cautious market mood, as well as an uptick in US Treasury bond yields. Bond yields were pushed higher by the increased rate hike bets. The renewed bets came after hawkish comments from Fed policymaker James Bullard on Tuesday.
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