Sterling made modest gains on Tuesday and has traded in a tight range overnight continuing to be susceptible to market risk sentiment. British manufacturers expect to raise prices by the most since 1977 over the next three months, as they wrestle with serious labour shortages and the biggest increase in costs since 1980, a quarterly survey showed on Tuesday. The Confederation of British Industry (CBI) data looks set to reinforce the Bank of England’s fears that high inflation is getting ingrained into business’s pricing plans, bolstering the chances it will hike interest rates again next week. The International Monetary Fund yesterday cut its forecast for British economic growth this year due to disruption from the Omicron variant of the coronavirus, labour shortages and high energy prices, but raised its estimate for growth in 2023. The IMF said it now expected British gross domestic product would expand by 4.7% in 2022 and by 2.3% in 2023, compared with its previous forecasts, made in October of 5.0% and 1.9%.
The euro has erased a small portion of its weekly losses against the dollar, after hitting its lowest level this year on Tuesday. However, further recovery attempts are likely to remain limited if market risk sentiment prevails. The European Central Bank’s chief economist Philip Lane said yesterday the central bank would tighten policy if inflation was seen holding above its target, but such a scenario appears less likely for now. Lane also said the ECB was increasingly relaxed about the economic impact of the Omicron variant. His comments come just over a week before the ECB’s next policy meeting. The German IFO Business Climate index showed the mood among exporters brightened considerably in January, with almost all industries expecting growth.
The dollar capitalised on safe-haven flows on Tuesday, with the dollar index reaching its highest level in two weeks and is consolidating those gains in early trading. The Federal Reserve bank will announce its interest rate decision and release its monetary policy statement later today. The Fed is widely expected to leave its policy rate unchanged in January. Traders expect FOMC policymakers to signal that there will be a 25 basis points rate hike in March. Chairman Jerome Powell will likely be asked about the timing of the balance sheet reduction, the possibility of a 50 bps rate increase in March and the number of possible rate hikes until the end of the year. Powell’s comments on the inflation outlook will also be watched closely by market participants.
19.00 US Federal Bank rate decision
19.00 US Federal Bank policy statement
19.30 US Federal Bank press conference