February 3, 2022

“The Bank of England is widely expected by economists and financial markets to impose the first back-to-back interest rate rises since 2004. ECB president Christine Lagarde needs to strike a very hawkish tone for the EUR to maintain its bullish momentum this week.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Joe Biden has ordered the deployment of an additional 2,000 troops to bolster NATO’s defences in Europe, strengthening the alliance’s response to a possible Russian invasion of Ukraine. Pentagon’s spokesperson, John Kirby, announced the move during a briefing with reporters on Wednesday. In addition to sending about 2,000 troops from Fort Bragg, North Carolina to Poland and Germany, the US said it would redeploy roughly 1,000 troops from Germany to Romania. As the Russian military build-up along Ukraine’s border intensified in recent weeks, Biden put 8,500 troops on standby for deployment to the eastern flank of NATO and discussed details of a possible move with US allies. Please use the sharing tools found via the share button at the top or side of articles. US officials have warned that Russia has continued to increase its military preparations, including additional movements of troops along Ukraine’s border in Belarus and naval activity in the Mediterranean. Moscow has deployed more than 100,000 troops and heavy weaponry along Ukraine’s borders, according to western intelligence.

The Bank of England is expected to hike interest rates again at its meeting on Thursday, as it looks to combat rising inflation. Economists believe Threadneedle Street will raise rates by a further 25bp after it put rates up in December from record lows of 0.1% to 0.25% – the first major central bank to do so coming out of the pandemic. The market is pricing in an interest rate rise to 0.5%, expecting rates to hit 1% by the summer and 1.25% by the end of 2022. The move would be the first back-to-back rate hike since 2004. The Bank is taking action to bring inflation back to its 2% target, even though Omicron knocked the economy in December and early January. The hit to growth is likely to have been “more modest” than first feared, he added, while recent official figures confirmed the UK jobs market continues to fire on all cylinders with little impact from the end of furlough. Nevertheless, the Bank is still left with a difficult decision, given the knock to consumer pockets from looming energy bills and fuel price rises – which policymakers are powerless to control with rate hikes.

GBP

Sterling weakened against most major currencies overnight. Johnson faced three new calls to resign from within his own Conservative Party on Wednesday, adding to the steadily growing number demanding he quit over a series of parties at Downing Street during lockdown. Meanwhile, he claims that the government would continue to try to recover taxpayer’s money lost to fraudulent claims for financial support during the coronavirus pandemic. Ministers are in danger of trapping the UK in a future of low growth and high taxes, according to the head of the country’s largest business group. Tony Danker, director-general of the CBI, will raise the concerns in a speech today about the impact of next year’s corporation tax rise on business activity with companies looking to invest as the country emerges from the coronavirus pandemic. Furthermore, Britons will learn the scale of the financial pain they face when the energy regulator Ofgem announces an increase to its price cap, with under-pressure households expected to see bills soaring by about 50%. The UK is unlikely to meet its 2050 target for net zero emissions because the government has no clear plan to decarbonise heating and insulate homes, a cross-party committee of MPs has warned.

EUR

Euro is weaker against the dollar and stronger against sterling this morning. President Tayyip Erdogan is set to visit his counterpart Volodymyr Zelensky in Ukraine on Thursday after pitching Turkey as a mediator to ease tensions with Russia, and an official said he was not picking any sides in the crisis. The Turkish official told Reuters that Ankara expects tensions to ease after the meeting in Kyiv. On Wednesday, Ankara and Kyiv said they would sign a free trade agreement and other deals. The Italian League leader, Matteo Salvini, has proposed creating a right-wing political force styled on America’s Republican party in a move that threatens to spell the end of his tense partnership with his far-right sometime rival Giorgia Meloni. Meanwhile, the country will soon announce a timetable to roll back its COVID-19 curbs, Prime Minister Mario Draghi said on Wednesday, as a surge in cases fuelled by the highly contagious Omicron variant started to slow. Health Minister Olivier Veran said that France’s vaccine pass will remain in place until hospitals are able to function normally without cancelling non-emergency procedures to make room for COVID patients in intensive care. Daily COVID cases in Germany hit a new record as of this morning.

USD

The dollar continues to strengthen against most major currencies in the early morning trade. Joe Biden’s nominee for the Federal Reserve’s top regulatory position will warn she intends to take a tough approach to policing Wall Street, arguing stability should “never be compromised in favour of short-term political goals” as it was during the 2008 crisis. In prepared testimony released ahead her Senate confirmation hearing on Thursday, Sarah Bloom Raskin doubled down on her uncompromising stance despite a barrage of recent attacks from Republicans. Meanwhile, the first black woman nominated to Fed board faces rocky confirmation – Joe Biden’s push to diversify top ranks of US central bank draws opposition from conservatives. Demand for workers and employee turnover in the US remained at historically high levels at the end of 2021, a sign of the tightness in the labour market that has weighed on the economic recovery. Tuesday’s data shows that the US is still struggling to fill job openings as labour market tightness persists. The number of job openings edged up to almost 10.93mn on the last day of 2021. That was a small boost from the almost 10.78mn openings at the end of November, and higher than Wall Street forecasts for 10.3mn openings.

Markets

The rally in global stocks faltered Thursday following disappointing earnings from technology bellwethers and as traders await more clues on how quickly key central banks will tighten monetary policy. US equity futures dropped, with contracts on the technology-heavy Nasdaq 100 down some 2%, after Facebook parent Meta Platforms Inc. and streaming service Spotify Technology SA plunged in late trading on soggy forecasts. European futures and MSCI Inc.’s Asia-Pacific index retreated. US shares closed Wednesday, taking global stocks to their best four-day advance since 2020, but the tech fallout overshadowed that winning run. A strong regional inflation print is buttressing the euro and adding pressure on the European Central Bank to reconsider its dovish stance. Policy decisions from the ECB and the Bank of England are due Thursday. Meanwhile, ADP figures before Friday’s jobs report showed employment at US firms shrank in January by the most since the early days of the pandemic. The omicron virus variant dealt a swift yet likely temporary blow to the labour market. Meanwhile, Western officials have warned of punishing economic sanctions if Russia invades Ukraine, which the Kremlin denies it plans to do.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Turkey Jan. CPI
8:30 a.m.: Sweden Jan. PMIs
9:15 a.m.: Spanish Jan. PMIs
9:45 a.m.: Italy Jan. PMIs
9:50 a.m.: France Jan. PMIs
9:55 a.m.: Germany Jan. PMIs
10:00 a.m.: Euro area Jan. PMIs
10:30 a.m.: U.K. Jan. PMIs
10:30 a.m.: Spain sells inflation-linked bonds
10:50 a.m.: France sells bonds
1:00 p.m.: BOE policy decision
1:30 p.m.: BOE’s Bailey speaks
1:45 p.m.: ECB policy decision
2:30 p.m.: ECB’s Lagarde speaks
2:30 p.m.: Czech rate decision

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