News & Analysis


The pound is trading on the front foot this morning after this morning’s data docket showed an increase in UK January retail sales of 1.9% MoM, well above the consensus of 1.1%, while the figure excluding auto fuel rose by 1.7% after a drop of 3.9% the month before. An increase in the month-on-month figure was widely expected after December’s sluggish print where Omicron had a more significant impact. In comparison, January’s print was less impacted by this as concerns around the virus had eased. The data marks the third top-tier print of the week that has exceeded market expectations, which further supports the view of aggressive tightening by the Bank of England. Money markets have fully baked in at least a 25bps rate hike in March, while they give a 43% change of a larger hike. Similarly, nearly three 25bps rate hikes are priced in until the May meeting, which is just two meetings away, meaning that a 25bps rate hike in March would only further embolden expectations of another 50bps in May.


EURUSD saw one of the bigger moves in the G10 on Thursday morning after headlines suggested Russian-occupying forces fired on village in the Luhansk region, with the currency pair immediately falling over 0.5% on the news. Fears that both sides accusing each other of first contact resulting in escalated military actions hampered the European currency along with equities in the region. Throughout the day, losses were recuperated in the EUR and sentiment remained more optimistic after the US confirmed that Secretary of State Antony Blinken will meet with his Russian counterpart next week for further talks.  For today, European Central Bank’s Vasle and Panetta will be eyed for further guidance on what the March ECB meeting may look like after the January meeting suggested a hawkish pivot in March is incoming. On the data calendar, euro area consumer confidence for February will be watched at 15:00 GMT and should show a moderate improvement since January’s figure as increasingly more eurozone countries have loosened Covid measures.


Risk appetite remained tentative in yesterday’s session as headline risk caused sharp reactions in the FX space before quick reversals took place. While the S&P 500 dropped over 2% in yesterday’s session as the US warned further that Russia could invade Ukraine in the coming days, the impact in FX markets was relatively muted. News overnight that Russian Foreign Minister Sergei Lavrov will meet US Secretary of State Antony Blinken for talks in Europe next week has helped ease the strain on market risk sentiment, leading to a further decline in the dollar at the margin this morning. While economic events still play out in the background, such as US initial jobless claims, the market focus remains squarely on events at the Ukrainian border. However, a notable development from yesterday on the economic front came from Fed member James Bullard. The St Louis chief reiterated that the Fed should raise interest rates by 100bps by July 1st, but also stated that taming inflation may require to overshoot a neutral interest rate target of 2%. The latter is a notable point as markets have better adjusted to a steeper rate profile from the Federal Reserve over the past few months but still halt their expectations of US interest rates short of the 2% inflation target, and further short of the Fed’s neutral interest rate estimation of 2.5%. Should markets start to adjust intermediate and back-end yields to the idea of a higher terminal rate, the dollar may begin to show another burst of strength. Today, the most notable economic event occurs at 16:00 GMT with New York Fed President John Williams taking part in a virtual discussion on the economic outlook. Williams’ views tend to be held in high regard given his role within the FOMC, and with limited communications from the NY Fed chief prior to today’s event, his choice of wording around the rate profile, inflation pressures and the Fed’s balance sheet are likely to prove influential.


The Canadian dollar remained tied up by the downturn in risk sentiment yesterday, however, with improving diplomatic relations overnight, the loonie starts this morning’s European session on the front foot as it seeks to return to this week’s high. A rebound in both US equity futures and a stabilisation in crude around the $90 per barrel mark is helping the loonie retrace recent losses and solidify gains driven by a hotter than expected inflation print on Wednesday. Today, retail sales data out of Canada for December is due at 13:30 GMT, but the lag included in the data release will mean the report is unlikely to move markets too dramatically. Instead, it will give economists further information as to how the economy performed over the lockdown periods in Ontario and Quebec as Q4 came to a close ahead of the final quarter GDP release on March 1st.



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