News & Analysis


Despite hotter than expected inflation data released yesterday morning out of the UK, the pound’s rally occurred much later in the day and was driven by a broader depreciation in the dollar. Focusing on the January inflation data first, the rise in headline CPI from 5.4% to 5.5% didn’t lead to a material increase in pricing of a 50bps hike from the Bank in March and thus had only a slight impact on sterling. This is largely due to aggressive positioning in the run-up to the release, with OIS markets pricing around a 50% probability of a 50bps hike, and the limited nature of the inflation push in January. The higher than expected CPI print was largely a result of smaller than usual January discounts in clothing and footwear which boosted the year-over-year figure. Instead, progressively supportive headlines around Ukraine and Russia, which trimmed the dollar’s strength at the margin, resulted in the pound posting a 0.36% gain against the greenback over the course of the day. GBPUSD now sits towards the top of its February range with the focus still very much on how rates markets are digesting incoming inflation news and the broader risk backdrop.


The euro saw renewed pressure from headlines around Russia-Ukraine and moved to a fresh low against the US dollar overnight after risk sentiment had improved somewhat over the course of yesterday. The risk-off flows in the G10 space was ignited by headlines from Russian state media pointing to alleged shelling of targets in Luhansk and Donetsk People’s Republics by Ukrainian security forces in breach of the Minsk agreements. On top of this, a senior US official said that Russia’s claims of it reducing military presence near Ukraine were false, and Moscow has instead added 7,000 troops along the border. This led investors to a flight to safety, with regional safe haven CHF strengthening as the euro weakened. The risk-off reaction was promptly unwound, however, a similar move in EURUSD occurred after the Londen open as reports suggested the Ukrainian military stated Russian occupying forces fired on a village in the Luhansk region. Markets will remain on the alert for further developments. On the agenda today is a series of European Central Bank speakers, with comments from ECB’s Pablo Hernández de Cos and Philip Lane expected throughout the day. Elsewhere in Europe, the Central Bank of the Republic of Turkey is expected to keep policy unchanged at 11:00 GMT as the government’s preference for lower rates should be offset by economic conditions invalidating another rate cut, given inflation printed at 48% in January and sentiment around the lira has crippled.


The US dollar remained offered yesterday as markets continued to trade on news of Russia’s withdrawal of troops from the border and the halting of military exercises. However, US officials claimed these reports were false overnight, which helped boost the dollar as it took a toll on the recently recovered risk sentiment in markets. This morning, reports from Ukraine’s military that Russian occupying forces fired on a village in Luhansk region has fuelled the concerns echoed by the US officials overnight and is helping keep bonds and the US dollar bid as markets brace for what could be another wave of intensifying military operations at the border. Recapping economic events from yesterday’s calendar; retail sales showed a sharp expansion in January, with sales printing at 3.8% YoY vs the consensus of 2.0%, while the FOMC meeting minutes saw Fed officials signal that a consensus of 4 or 5 hikes this year is likely in March. On retail sales, the market impact was arguably more limited as the seasonally adjusted figures overstated the retail sales data: the NSA showed the January reading saw the largest MoM decline in retail sales since the series was first collected in 1992. Meanwhile, the FOMC meeting minutes showed little discussion around quantitative tightening, with only the discussion of active MBS sales discussed and agreed on by “most participants”. With today’s calendar being virtually blank for the US, the focus remains on developments in broader macro flow and global risk.


Yesterday’s CPI data out of Canada shocked economists by substantially exceeding expectations. The headline figure rose from 4.8% YoY to 5.1%, beating expectations by 0.3pp in doing so. Only one out of the fifteen economists polled by Bloomberg expected such a print. However, the loonie’s reaction to the data was far more restrained than the overshoot in the data suggests. While the core measure and headline figures continued to tick upwards, the main inflationary push came from food, transport and shelter, while services inflation ex shelter actually fell. While some measures showed a broadening in inflation pressures, a large proportion of the price growth push is still concentrated in a small number of components. These underlying drivers limited the loonie’s gains and the increase in speculation that the BoC will hike by 50bps at their March meeting. The result of which sees USDCAD still trade within its February range with the focus now shifting back to the geopolitical risk environment and the impact it is having on commodities and equities. With US equity futures trading in the red and WTI shedding nearly a percentage point this morning, the loonie is currently on its way to retrace all of yesterday’s gains. Meanwhile, domestically, police in Ottawa are warning truck drivers blockading the downtown core to depart or risk arrest as authorities look to end a three-week protest over Covid restrictions.


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