News & Analysis


The pound starts this morning on the front foot as it lags yesterday’s renewed risk-on bid after signs of easing geopolitical tensions in Ukraine. Helping the pound rally this morning was an above consensus CPI reading for January, the last inflation print ahead of March’s Bank of England meeting. The rise in headline inflation in January, from 5.4% to 5.5%, and the continued rise in core inflation is likely to further embolden expectations of a 50bps hike at either the March or May meeting. However, the increase in inflation was largely driven by less comprehensive January sales than last year. With core goods prices set to rise further in the coming months ahead of April’s energy price cap adjustment, it is likely that the Bank’s 5.7% Q1 CPI projection will be exceeded. However, we don’t think today’s inflation data justifies a changing stance from the BoE after policymakers made a confounded effort following February’s meeting to outline that market expectations are too stretched to the media. The more robust interest rate path priced in by markets is likely to continue supporting the pound in the coming days, however.


The euro benefited from an improvement in risk appetite yesterday after Russia signalled that some troops are starting to return to their regular bases after completing drills. This saw the single currency rip over half a percentage point higher on the day against both USD and GBP. Hawkish commentary by European Central Bank’s Francois de Galhau Villeroy likely helped to keep sentiment around the euro optimistic, although his comments didn’t provide an immediate rally. Villeroy, who is known for his dovish views usually, claimed that the transition between the end of PEPP and the end of net APP purchases could take only a couple of months, which suggests that QE could end wholly in Q3. The lack of reaction shows that markets have their eyes set on ECB tightening by year-end already, as they continue to price in the first rate hike in Q4 this year. There are no other ECB speakers or data releases scheduled for today, which means the euro will take continue to take cues from the geopolitical backdrop.


The US dollar took on some water yesterday as risk sentiment improved following the headline that some of Russia’s troops are returning to their bases, however the backdrop remains highly uncertain. The US has not verified that Russia has pulled back forces, and President Joe Biden even stated an attack is still very much a possibility. NATO’s Secretary-General Jens Stoltenberg added there are no signs of de-escalation on the ground from the Russian side. Markets will continue to keep an eye on the Russia-Ukraine situation along with tonight’s release of the FOMC meeting minutes from January. The minutes should shed more light on the speed and timing of the balance sheet runoff, while clues as to how the Fed’s reaction function may evolve will also be eyed after the latest jobs and inflation reports came in piping hot.


The Canadian dollar failed to benefit from the risk rally in the same way as other procyclical currencies yesterday given the slide in crude oil prices from their highest level since 2014 to fresh lows. Still, oil prices continue to trade well above monthly ranges and serve as a backstop for CAD along with the hawkish sentiment around the Bank of Canada. Today’s session will include the release of Canadian CPI at 13:30 GMT, where risks are tilted in favour of a further increase in inflation from December’s 4.8% reading despite consensus estimates pointing towards no change. Should inflation pressures begin to broaden in Canada, the January CPI report could prove deterministic for expectations of a 50bps hike by the BoC in March, which have taken a beating over the past week. Markets currently imply a 25% probability of a 50bps hike, down from 50% midway through last week.

FX Elsewhere

The Swedish krona jumped over 1% higher against the greenback yesterday as the optimism in markets on a diplomatic resolution in Ukraine meant SEK was less exposed to regional risks. The krona has so far been highly sensitive to changes in the geopolitical backdrop, as the currency doesn’t have much in its favour at the moment that would protect the currency from tumbling: risk sentiment is tentative, which doesn’t bode well for the procyclical SEK, while the single currency also can’t find support in signs of policy tightening by its central bank given the Riksbank’s latest dovish stance on inflation. In addition to the easing geopolitical tensions, Riksbank Governor Stefan Ingves spoke out to the media yesterday and stated there is a slight risk of a significant and lasting inflation overshoot. The commentary is arguably more hawkish than the previous statement and led to a modest extension in the krona’s rally on the day. The focus will now turn to Swedish CPI figures which are released Friday morning.


This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.