Powell testimony reassures markets

Lawrence Kaplin
Lawrence Kaplin 12 January 2022

GBP: 23-month high versus Euro

EUR: Lagarde "trust us"

USD: Powell pushes back against an early balance sheet run-off

 

Sterling

Sterling touched a pre-pandemic high versus the euro yesterday as broad risk appetite returned to markets following Fed Chair Powell’s nomination testimony. As UK inflation remains at stubbornly high levels, markets have ramped up expectations that the BoE will raise interest rates at February’s MPC meeting. Whilst the pound is riding high versus a beleaguered euro, the sterling index remains well below the 16-month high it made last November. Over the coming weeks, we expect the now four to five interest rate rises priced in for 2022 to moderate pressure on real incomes increase as we go through the winter period.

With a blank UK economic calendar until Friday’s GDP report, sterling will likely be guided by broader market moves.

 

Euro

The euro had another quiet trading session yesterday as the ECB President joined the growing number of Central banks who are seeking to reassure public concern over the rising cost of living. Whilst comments like: "We understand that rising prices are a concern for many people, and we take that concern very seriously, people can trust that our commitment to price stability is unwavering”, Mme Lagarde’s soothing words are all well and good, but with Eurozone inflation at a record high, surely monetary policy action is required.Industrial Production data set to be released at 10am.

 

US dollar

The dollar rally post last week’s Fed minutes on expectations the Fed would begin quantitative tightening as early as April were dealt a heavy blow yesterday after Fed Chair Powell pushed back against an early balance sheet run-off. Whilst maintaining his stance that interest rates will indeed need to rise this year to curb soaring inflation, it was the push back against unwinding Bond asset purchases that caught markets by surprise and gave an immediate boost to risk assets and helped move the dollar back down.

Markets are now focussed on today’s key inflation report, where expectations are for a slight pullback to 0.4% for the month of December, but for an eye-watering annual increase of 7%.

 

Market rates

Today's Interbank Rates at 08:05 against sterling movement vs yesterday.

Euro €1.200 ↑
US dollar $1.363 ↑
Australian dollar $1.891 ↓
South African rand R21.16 ↓
Japanese yen ¥157.3 

 

Have a great day.