In comments on Monday, Bank of England Governor Bailey stated that the UK was facing a very large shock to income and spending while the shock from energy prices this year is likely to be larger than any single year in the 1970s. He added that the bank is beginning to see evidence of a slowdown in the economy while there is a very large trade-off between inflation and output. According to Bailey, there are risks in both directions to the outlook and trade-off situations are very difficult to deal with. Bailey also stated that the bank had been very cautious over forward guidance given the very high degree of uncertainty and in reference to the May rate decision is concerned, he noted that the situation is very volatile. He did add that it is appropriate to tighten policy, but the overall rhetoric continued to cast doubt whether the bank would pursue an aggressive run of interest rate hikes which undermined potential Sterling support in global currency markets.
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Sharp moves on the yen crosses had a significant impact in Europe on Monday with a yen slide against the Euro triggering a wider Euro advance to a peak against the dollar, but momentum faded quickly and there was significant Euro selling on rallies. There were further concerns over the Euro-zone outlook and tensions surrounding Ukraine remained high with the US stating that Russian President Putin is not ready to make compromises to end the Ukraine war. There were also reports that the G7 had rejected paying for gas supplies in roubles, increasing the risk of disruption. There was, however, a sharp decline in oil prices which provided an element of relief for the Euro-zone outlook and Euro yields moved higher.
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The Dallas Fed manufacturing index retreated to 8.7 for March from 14.0 previously while inflation pressures remained very strong and there were stronger upward pressure on wages, maintaining underlying concerns over the inflation outlook. The US goods trade deficit narrowed to $106.6bn for February from $107.6bn the previous month with exports increasing at a slightly faster rate on the month.
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