Government to help with cost crisis?

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Looking ahead to Wednesday

Inflation data is due out on Wednesday, where expectation is for that to be up to at least 6% as supply chains continue to struggle and energy prices continue to increase.

The Bank of England has hiked rates three months in a row. Normally, this would have had some effect on inflation, but these are far from certain times and with the increase to National Insurance and the higher energy cost cap coming in, perhaps the Bank Of England has done all it can for now and maybe the Government needs to wade into the cost-of-living crisis.

Sunak's Spring Statement is also due on Wednesday, as an update his November Budget.? Behind the scenes, Boris has been pressuring him to cut the VAT on energy prices and the petrol prices in particular, because any windfall tax on energy company profits looks more likely to replenish the country's coffers than be passed on to the consumer.

In the market last week, Sterling staged a bit of a rally. We climbed back to 1.3210 against the dollar, but remained pretty flat, around 1.1925 against the Euro.?

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US rate hikes to be slow and steady

The Fed raised rates by 25 basis points, which was widely expected. There were still pockets in the markets who thought 50 basis points might be on the cards, as the front-loading logic made sense before Russia invaded Ukraine, but the level of advance guidance from the Fed, and the uncertainty of the war, made the outcome pretty unsurprising.?

Slow and steady seems to be the way ahead for the Fed because, as rates continue to rise throughout the year, they will receive more data and will be in a better position to judge if a 50 basis point rate hike might be needed. The market seems comfortable with the idea of a cautious start, with all the uncertainty with the war, because the Fed can always speed up the normalization of interest rates later in the year.?

The dollar index touched a high of 99.30 but couldn’t sustain the rally. We closed out the week around 98.20.

ECB split over priorities to focus on

Christine Lagarde is pushing her agenda, where she feels that inflation is of secondary concern to the threat of a recession.? This runs contrary to the Bundesbank who believes that rising inflation is becoming the main economic threat.

They also see it as important to protect the single currency, while Lagarde does not see the devaluation, created by higher inflation, as critical yet.? She believes that the ECB has a little wiggle room in the next few months which will allow them to continue buying assets to support the weaker economies.? But, at some point, the ECB will need to unwind its balance sheet and that may not run smoothly.?

Last week, EUR/USD rose to 1.1135 and closed around 1.1050 and it is unlikely to break above 1.1250 until there is a clear advance in the peace process between Russia and Ukraine. That kicks off the new week from around 1.1040.