Talk is cheap
Yesterday, sterling's direction was set as much by diplomatic efforts as by concrete economic data. With Russia apparently withdrawing troops from the borders of Ukraine, risk sentiment improved, and as it did, sterling climbed against the dollar whilst giving up ground against the euro. After a solid set of employment figures were released yesterday this morning, the Office for National Statistics reported the latest inflation data.
The headline figure from the Consumer Price Index was 5.5%, up from last month and slightly higher than analysts had been expecting, as was the Retail Price Index. More worryingly, the Producer Price Index was, an indicator of future trends, was also higher than expected. With petrol on the forecourts touching record highs yesterday, inflation shows no signs of abating. Consequently, the likelihood of a base rate rise next month grows, encouraging sterling higher.
The euro was the primary beneficiary of easing geopolitical tensions yesterday, gaining on nearly all of its rivals. Investors are generally cautious and take the view that there has been little sign of soldiers withdrawing from Ukraine's border regions despite all the talk.
Today the euro has opened better as optimism abounds about a peaceful end to the standoff in Ukraine. With little tier one economic data, apart from Industrial Production, the single currency's direction looks set to be determined by both sterling and the dollar, which both have major economic data released.
Stock markets recovered some poise yesterday as risk sentiment turned positive, leading to the dollar retreating from its recent high levels as demand for safe-haven assets diminished. It is open to debate for how long the dollar will stay on the backfoot, especially after the higher-than-expected Producer Price Index for January showed little sign that inflation is peaking.
This afternoon sees the publication of the latest reports on Industrial Production and Retail Sales shortly after lunch. Today's most important event, the minutes from the last Federal Open Market Committee Meeting, will come after most of us have gone home and are enjoying our tea. After Jerome Powell's hawkish press conference following the last meeting, it can be reasonably expected that the Federal Reserve had a forthright exchange of ideas, and the minutes should give some clues to the likelihood of a .5% rise at their next meeting.