USD

Reports that some Russian troops had started to withdraw from the Ukrainian border had boosted hopes that the Russian-Ukraine conflict is starting to de-escalate. This led to a lift of some of the risk appetite in the market from the previous session. As a result, oil prices also eased from the earlier highs seen in the week, down by around 3%, after hitting a seven year high.

Safe-haven flows have continued to move away from the USD, but President Biden yesterday said there is still a chance of conflict between Russia and Ukraine as the US had not seen enough evidence of Russia pulling its troops back.

The US dollar remains supported by comments made by Federal Reserve President James Bullard. He reiterated that the Fed should look to raise interest rates by 100 basis points by July to combat rampant inflation. However, other Fed officials have been less willing to commit to a half-point hike, or are even concerned it could cause trouble.

The market today will be focused on US inflation data released, which is expected to show that inflation has eased to 9.1% down from the previous 9.8%. Anything reading above the forecast could reiterate the need for the Fed to raise interest rates swiftly and in turn support the USD. Later this evening the Fed’s Minutes will be released, which will again be closely scrutinised for clues on whether a 50 basis points hike was discussed during the last rate decision meeting.

GBP

The pound eased some of the losses from the previous session against the USD. The main headline for the UK this morning is the inflation reading which continues to rise sharply, posting a thirty year high at 5.5%. It is the highest reading since March 1992 when it came at 7.1%.

Earlier in the week the Bank of England warned that consumer price inflation could peak at about 7.25% by April, as surging energy prices are fed through to consumers. With inflation forecast to continue for months to come, the BoE may look to raise rates again as early as next month and potentially by a 50 basis points. This should continue to support Sterling against the euro.

The European Central Bank has stated that they still believe inflation is transitory, although mentioning that they will need to keep an eye on it and may look to normalise monetary policy for the end of the year. ECB Executive board member Isabel Schnabel said in an interview, “it has become increasingly likely that inflation is going to stabilise around our two per cent target over the medium term. We should start thinking about a gradual normalisation of our policy. With the most recent data, however, the risk of acting too late has increased and therefore we need a careful reassessment of the inflation outlook”.

Key announcements

07.00 – UK CPI reading 5.5%
13.30 – US core retail sales – forecast 1.0%
13.30 – Retail sales m/m – forecast 2.1%
14.15 – US industrial production – forecast 0.4%
19.00 – FOMC minutes