The tragic situation in Ukraine continues to deteriorate. Financial markets remain volatile, with significant increases in energy prices. There will clearly be an economic impact globally. Equity markets have fallen sharply across the world. There have been sharp rises in other commodities including industrial metals and agricultural products.
All of this disruption will put further upward pressure on inflation. Higher prices and the uncertainty of war will slow economic activity. Central banks will find this a very challenging policy trade-off. The Bank of England will likely prioritise flexibility and carefully weigh further moves.
The January GDP figure is expected to show a return to growth of 0.4% for the UK, though this is unlikely to have any significant impact given the current situation. The focus will be on how the existing geopolitical situation will affect inflation and growth into the second quarter. Inflation will almost certainly peak higher than BoE’s latest 7.25% prediction. Sterling has lost substantially against the US and Antipodean dollars, whilst gaining against the Euro to the highest post-Brexit level.
GBPEUR – 1.2155
GBPUSD – 1.3217
The European Central Bank’s new economic projections with the policy update will no doubt show near-term inflation staying higher for longer. The key question will be whether inflation is forecast to fall back to the 2% target in 2023 or 2024. Growth forecasts are likely to have been downgraded from 4.2%. This may dampen medium-term inflation pressures. The ECB are likely to maintain asset purchases and hold off on announcements until things become clearer in Eastern Europe.
Last week, Eurozone CPI inflation increased to 5.8% for February. This may well rise towards 7% in the coming months. The restrictions against Russia and removal of trade and energy links will likely affect Europe substantially. The euro has been a key under performer along with the Polish Zloty and Hungarian Forint in the last week.
EURUSD – 1.0874
EURGBP – 0.8227
The most notable data this week is February inflation, which is expected to show an increase to around 8%. It will likely now peak above this level which would be a forty year high. This will keep pressure on the Federal Reserve to increase rates, though the impact of events in Ukraine may temper the reaction.
Fed Chair Powell’s comments at his semi-annual testimony to Congress last week suggested that rates will rise. He did say that he would support a 25bp rather than a 50bp rise. High inflation has weighed on US consumer sentiment which fell to a decade low in February. Unemployment fell more than expected to 3.8%, though annual earnings growth slowed unexpectedly to 5.1%. This will all give the Fed a lot to think about ahead of their upcoming policy decision.
GBPUSD – 1.3217
EURUSD – 1.0874
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*Interbank rates correct at 7 am on the date of publishing.
