GBP

The pound gained by around 0.3% against the euro and the dollar on Thursday as it was supported by market bets on monetary tightening from the Bank of England. Expectations of a third rate hike in a row have supported the pound with analysts suggesting we could see a rise to 0.75% or 1% on March 17th. Despite tensions remaining high over the Russia-Ukraine conflict, sterling has remained largely unaffected by the latest developments. Speaking in Kyiv yesterday, Foreign Secretary Liz Truss announced the UK would be spending an additional £12m on democracy and energy independence projects in Ukraine, thereby increasing funding for Ukraine’s defence capabilities from £88m to £100m. Meanwhile, this morning’s release from the UK’s Office for National Statistics reported that Retail Sales rose by 9.1% on a yearly basis in January. Sterling jumped as a result with this figure beating market expectations for an increase of 8.7%.

EUR

The euro has remained under pressure this morning as its movements continue to be dictated by Russia-Ukraine headlines. Traders fret that the Eurozone economy is particularly vulnerable to a Russian retaliation if NATO were to apply sanctions to Russia for invading Ukraine, including potential disruptions to their already frail gas imports. Euro bulls were hoping for some support from a speech by European Central Bank Chief Economist Philip Lane yesterday, although he did little to shift the dial for the common currency. Lane offered few hints to ECB sentiment as he said that risks to inflation are tilted to the upside in the near term and that the size and frequency of rate moves will depend on the inflation regime. Looking forward, the market hopes for more concrete views from the ECB’s Elderson and Panetta, with them both set to speak later today. Consumer Confidence for February could also offer some direction.

USD

The US dollar has traded sideways over the last 24 hours with speculation on geopolitical tensions in Europe remaining divided. Despite exchanges of fire between Kyiv’s forces and pro-Russian separatists, diplomatic progress was made between the US and Russia. Late on Thursday, the US State Department said that Secretary of State Antony Blinken had accepted an invitation to meet with Russian Foreign Minister Sergei Lavrov late next week provided Russia does not invade Ukraine. Also weighing on the dollar was uncertainty over the Fed’s plans to combat stubbornly high inflation. Speaking yesterday, Cleveland Fed President Loretta Mester attempted to address doubts saying, “I anticipate that it will be appropriate to move the funds rate up at a faster pace this time and to begin reducing the size of the balance sheet soon and more quickly than last time”. Despite this hawkish view, the dollar gained little support as other central banks’ hawkish shifts have also pushed up the yields of long-dated government bonds in other developed markets, resulting in a smaller shift in relative yields for the US.

Economic Calendar

13:00pm EUR ECB’s Elderson Speech
15:00pm EUR Consumer Confidence (Feb)
16:00pm USD Fed Monetary Policy Report
18:30pm EUR ECB’s Panetta Speech