Bank of England chief economist Pill stated that it’s better to adopt a measured approach to monetary policy as rapid moves can be destabilising.

After some dovish rhetoric earlier in the week, the Bundesbank struck back on Wednesday with recently-appointed head Nagel stating that that he would advocate a move to normalise monetary policy if the inflation picture does not change by March. He added that the costs of acting too late are significantly higher than acting too early.

In the US Cleveland head Mester, a traditional hawk on the FOMC committee, stated that that balance sheet reduction should start earlier and at a faster pace.

Atlanta Fed President Bostic stated that inflation should be close to peaking, but also indicated that he could back four rate hikes this year.

Despite relatively hawkish rhetoric from ECB and Fed officials and expectations of monetary tightening, US and European equity markets posted solid gains. Sentiment was underpinned by hopes that global supply-side stresses and inflation pressures were peaking.

There were also strong gains in the technology sector which supported wider sentiment and markets were hopeful that tensions surrounding Ukraine had eased slightly.

The latest US CPI inflation data is due for release ahead of Thursday’s Wall Street open and will have an important impact across all asset classes.

Consensus expectations are for a headline increase of 0.5% with the year-n-year increase at 7.3% from 7.0% which would be the strongest reading since March 1982.

Core prices are forecast to increase 5.9% over the year from 5.5% previously which would be the highest reading for over 39 years.

Stronger than expected data would increase pressure for the Federal Reserve to deliver a 50 basis point rate hike at the March meeting and potentially undermine equities again while a softer release would support risk appetite and dampen dollar demand.

Bank of England chief economist Pill stated that it’s better to adopt a measured approach to monetary policy as rapid moves can be destabilising. Nevertheless, he also stated that it had been a close call between a 0.25% and 0.50% rate hike this month and that he would not want to exclude rate adjustments of more than 0.25% in the future.

Wage developments will be important and he noted that a tighter than expected monetary policy might be needed if there is evidence of second-round effects in wage and cost trends. The overall message was that gradual rate increases will be preferred over the next few months with little net change in money-market rates.

Trading ranges were again subdued on Wednesday ahead of the US CPI data. USD/JPY held firm around 115.65, but was unable to post a fresh 1-month high.

The Euro was underpinned by more hawkish Bundesbank rhetoric, but was unable to gain significant traction. EUR/USD failed to break above 1.1450 and settled around 1.1425.

GBP/USD failed to break 1.3600 and Sterling bulls were unable to gain any impetus from Band of England Pill’s comments. GBP/EUR edged lower to 1.1845 with UK rate hikes priced in.

Commodity currencies were able to make net headway on hopes for stronger global demand. AUD/USD posted a 2-week high just below 0.7200 before correcting slightly. The Canadian dollar resisted losses with USD/CAD around 1.2675.

Headline Norwegian inflation declined sharply to 3.2% from 5.3% which limited krone support and EUR/NOK traded around 10.07.

Economic Calendar

13:30USD CPI Ex Food & Energy (Y/Y)(JAN)5.50%
13:30USD CPI Ex Food & Energy (M/M)(JAN)0.60%
13:30USD Initial Jobless Claims260K
13:30USD Continuing Jobless Claims1675K
19:00Monthly Budget Statement(JAN)-25.0B-21.0B
21:45NZD Electronic Card Retail Sales (Y/Y)(JAN 01)4.20%
21:45NZD Electronic Card Retail Sales (M/M)(JAN 01)0.40%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.