Core Euro-Zone inflation hits fresh record high.

Euro-Zone consumer prices increased 0.8% for February with the headline inflation rate declining to 8.5% from 8.6%, but this was significantly above consensus forecasts of 8.2%.

The underlying inflation rate increased to a record high of 5.6% from 5.3% and above market expectations of 5.3%. Markets moved to price in a peak rate of 4.00%.

Revised data on unit labour costs recorded a 3.2% increase for the fourth quarter of 2022 with a 6.3% annual increase in costs. The increase in labour costs was much higher than for the original estimate which has recorded an increase of 1.1% and annual increase of 4.5%.

The higher rate of increase in labour costs reinforced fears that the Federal Reserve would have to tighten policy further to bring inflation under control.

Fed Governor Waller stated that the central bank may need to raise rates beyond the December 5.1-5.4% view and that progress on inflation had been slower than expected, although he added that there some reasons for hope with a sharp deceleration in rent increases.

Treasuries lost further ground after the US data with further concerns over underlying inflation pressures. The 10-year yield increased to fresh 3-month highs around 4.08% before a limited retreat to 4.04% on Friday.

According to Bank of England chief economist Pill, the evidence suggests that the economy has been slightly stronger than expected and the pace of wage settlements was also slightly stronger than expected, but he also commented that some high-frequency indicators of wages had fallen quite sharply recently.

Wall Street indices managed to make limited gains on Thursday despite inflation and Fed fears. Asian bourses also made headway with China releasing another positive report with a stronger rebound in the Caixin PMI non-manufacturing index.

The dollar posted gains on Thursday, but was held just below 8-week highs and edged lower on Friday as equities managed to post gains and defensive demand faded slightly.

The latest US ISM services data will be released on Friday. This will be a key piece evidence on conditions in the non-manufacturing sector.

Consensus forecasts are for a headline reading of 54.5 from 55.2 previously.

The prices and employment data will also be very important within the release.

The Euro was unable to gain further support on Thursday and failed to secure any traction from the inflation data. Stronger inflation and hawkish ECB policy moves had been priced in to some extent. The dollar secured net support on yield grounds. EUR/USD dipped to lows near 1.0575 late in Europe.

Strong Chinese data helped pull EUR/USD back above 1.0600 on Friday. Higher US yields also hurt the yen during Thursday. USD/JPY posted highs just above 137.00 before a retreat to 136.60 on Friday.

The Swiss franc regained some ground during the day. EUR/CHF dipped back below parity to 0.9980 from 1.0040 with USD/CHF retreating to 0.9400 from 0.9440 highs.

Sterling lost ground with no hawkish rhetoric from BoE’s Pill. GBP/USD dipped to lows at 1.1925. GBP/USD recovered to 1.1975 on Friday amid a less negative risk tone.

Commodity currencies lost ground amid a firm US dollar and global risk concerns, but recovered ground on Friday. AUD/USD dipped to near 0.6710 before a rebound to 0.6750 after the Chinese data. The Canadian dollar was resilient with USD/CAD settling around 1.3625 before a retreat to 1.3580.

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