News & Analysis


Yesterday’s upside surprise in UK CPI inflation figures further bolstered expectations that the Bank of England will hike interest rates in February to keep inflation in check, which was supportive of the pound throughout yesterday’s session. The FX impact was limited as market expectations for BoE tightening were already high, meaning risks to the event were asymmetrical. Later in the afternoon, Prime Minister Boris Johnson confirmed that Plan B Covid curbs will expire next week. The work from home order, the requirement for Covid passports at large events, and mandatory face masks will all come to an end, which makes the UK the first developed market to emerge from a large Omicron wave of infections and treat the virus like the flu. This could help keep the pound buoyant, especially if there is a significant difference in virus policy compared to other countries, but at the same time attaches risks to the outlook as well.


Price action in the euro over the last 24 hours was nothing to write home about, as idiosyncratic euro drivers remain light. Germany’s CPI inflation figures rose by 3.1% in 2021, according to yesterday’s numbers from the Ifo institute, while German government bonds sold off further and returned to positive yields. Unlike in the UK, the price increases were far from even. Energy products rose by 10.4%, due to the European energy crisis and tighter carbon supply, while food prices went up by 3.2%. Markets will now turn to today’s minutes of the December European Central Bank meeting, to get more insight on how the ECB views the inflation outlook. The minutes are released at 12:30 GMT.


The DXY index, which is a gauge for USD strength, closed negative on Wednesday as selling pressure arose from lower US Treasury yields, especially the 10Y yield. Despite the retracement, yields remain relatively high as market expectations for policy tightening by the Fed remain elevated. Markets are already pricing more than one 25bp rate hike from the Fed at its March meeting, which raises the bar for yields to climb even higher. Today’s calendar is rather light, with US Q4 earnings being the main release of note. Developments in Ukraine and Russia will also be watched by investors after President Biden commented on the situation and stated he thinks Russia will move in on Ukraine.


USDCAD put in a fresh low in yesterday’s trading session after the release of the Canadian CPI report but rose back to previous levels immediately afterwards. This may have been a case of “buy the rumour, sell the fact” dynamics playing out as the inflation figures printed in line with median estimates. Meanwhile, crude oil prices climbed to their highest levels since October 2014 after the International Energy Agency stated the market looked tighter than previously thought, with demand proving more resilient to Omicron than to earlier virus waves. In the latter part of the trading session, oil prices slipped from those highs after US President Joe Biden pledged to continue trying to lower prices and an industry report by the American Petroleum Institute pointed to a modest increase in US crude stockpiles.


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.