UK Inflation increases to fresh 29-year high.

Risk appetite strengthened in Europe on Tuesday following reports that Russia had pulled some troops away from the Ukraine border.

Comments from Russian President Putin later in the day were generally constructive following talks with German President Scholz. The overall rhetoric focussed on the Donbass situation and he stated that there had been a partial withdrawal of troops following military exercises which was in line with plans.

Western governments remained cautious, but the Euro posted net gains, especially with a commitment to maintain gas supplies to Europe.

Overall risk appetite strengthened amid hopes that military conflict could be avoided. There was still notable caution as US President Biden warned that a Russian attack was still possible. A protracted and messy situation would have only limited market impact.

Global equity markets recovered strongly on increased optimism over the Ukraine situation. There was also a notable decline in demand for defensive assets as immediate fears declined with a dip in risk premiums.

The yen and Swiss franc lost ground while there was also a sharp retreat for gold from 8-month highs.

There was also a sharp retreat in crude oil prices as the geo-political premium declined with a notable decline from 7-year highs.

The New York Empire manufacturing index recovered to 3.8 for February from -0.4 in January, but well below consensus forecasts of 11.8. The new orders component also moved back into positive territory for the month with a small increase in production.

There was a stronger increase in employment for the month while inflation pressures remained strong with a sharper increase in the prices received index for the month.

Companies were less optimistic over the outlook with inflation pressures expected to ease slightly.

Minutes from January’s Federal Reserve meeting will be released on Wednesday after the European close.

Markets will examine the overall rhetoric closely with a particular focus on the balance of power within the committee surrounding the possibility of a more aggressive move to raise interest rates by 0.50% at the March meeting.

Evidence of strong support for a 0.5% rate hike will underpin the dollar with net losses if caution appears set to dominate. Comments on reducing the balance sheet will also be watched closely in the text.

The headline UK inflation rate increased to a 29-year high of 5.5% for January from 5.4% previously and slightly above consensus forecasts of 5.4%. The core rate also increased to 4.4% from 4.2%. The data will maintain expectations of further Bank of England rate hikes. Immediate market reaction was muted with Sterling overall edging higher, primarily against a softer dollar.

A recovery in risk appetite curbed demand for the yen and Swiss franc during Tuesday.

Defensive demand for the dollar faded slightly, but the US performance was mixed. US bond yields moved higher with the 10-year yield near 2.05% before fading slightly. USD/JPY advanced to highs near 115.85 with consolidation around 115.70.

The Euro drew relief from an easing of Ukraine tensions. ECB council member Schnabel stated that there was an argument for ending asset purchases. EUR/USD secured a net gain to 1.1350 and secured a further net advance on Wednesday.

Sterling struggled to make headway despite firmer global risk conditions. EUR/GBP posted net gains to 0.8385, but GBP/USD traded above 1.3550 on a weaker dollar.

Commodity currencies secured a net recovery as equities recovered. AUD/USD strengthened to around 0.7170 as risk conditions dominated. USD/CAD retreated to 1.2715 despite the decline in oil prices.

The Swedish krona secured some relief with EUR/SEK retreating to 10.54.

Economic Calendar

07:00GBP PPI Core Output (Y/Y)(JAN)8.6
07:00GBP PPI Output (Y/Y)(JAN)9.10%9.30%
07:00GBP PPI Input (M/M)(JAN)0.90%0.10%
07:00GBP PPI Input (Y/Y)(JAN)13.10%13.80%
10:00Euro-Zone Industrial Production (Y/Y)(DEC, 2021)-1.50%
10:00Euro-Zone Industrial Production (M/M)(DEC, 2021)2.30%
12:00USD MBA Mortgage Applications-7.10%
13:30USD Advance Retail Sales (M/M)(JAN)-1.90%
13:30USD Core Retail Sales (M/M)(JAN)-2.30%
13:30USD Import Price Index (M/M)(JAN)0.30%-0.20%
13:30USD Export Price Index (M/M)(JAN)0.3-1.8
13:30Bank of Canada Core CPI (M/M)(JAN)0.00%
13:30Bank of Canada Core CPI (Y/Y)(JAN)3.50%4.00%
13:30CAD Manufacturing Shipments (M/M)(DEC, 2021)2.60%
13:30CAD Wholesale Sales (M/M)(DEC, 2021)2.70%3.50%
14:15USD Industrial Production(JAN)-0.10%
15:00USD Business Inventories(JAN)1.30%1.30%
15:00NAHB Housing Market Index(JAN)83
23:50JPY Machinery Orders (Y/Y)(DEC, 2021)11.60%
23:50JPY Merchandise Trade Balance Total(JAN)-583.3B

*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.