Taming inflation as shots were fired?

Is the Bank of England starting to tame inflation already?

UK inflation data for January showed inflation slowing a little, but it still reached a 30-year high of 5.5%. It was no surprise that energy costs were a main factor, so we can expect that pressure to remain with the Government price cap due to increase along with National Insurance contributions.?

The Covid recovery is in pretty good shape though. Despite a 0.2% contraction in December, due to the Omicron effect, the economy grew by 7.5% in 2021.?But now the focus has shifted onto inflation, there are concerns that the Bank of England could slam the brakes on hard enough to cause a recession. That would probably need continued aggressive rate hikes, falling business investment and overly aggressive wage demands to really risk thing spiralling out of control.?

The market remains pretty quiet and trading remains range bound. Sterling drifted between about 1.3550 and 1.36 yesterday and we open around 1.1960 against the Euro.?

Fed minutes point towards March rate hike

The latest Fed minutes were released yesterday.?Naturally, the discussion centred around rate hikes and while it still sounds very much like a rate hike will take place next month, no firm decisions were made as they looked at the ifs and buts of rising inflation and the expected economic growth.?All in all it was pretty standard stuff.

Retail sales data rose by 3.8% in January, which was well above forecast at 2.3%. That is all rather inconsequential next to the prospect of a 0.5% rate hike though.?

The dollar index took the Fed minutes in its stride, having adopted a wait and see approach. It drifted down towards 95.65 but rallied a little overnight on reports of an exchange of fire across the Ukrainian border.

Shots were fired?

Reports from Kiev suggested little evidence of Russian troops withdrawing from their positions on the border with Ukraine and there were reports of minor exchanges of fire overnight, but there is not much information about that so far.

The risk that hostilities may escalate increases the risk that Putin will use Russian gas to counter any sanctions that are put in place by the west, which would cause a major knock to the Eurozone economy. Diplomatic efforts will continue to diffuse the tensions there.

ECB Governing Council Member and Governor of the Latvian Central Bank Martins Kazaks believes that an interest rate hike this year is quite likely, to introduce a phased policy adjustment, but he believes that money market predictions of a hike before the end of H1 are too harsh as iking too quickly could elongate recovered.?

The euro is caught between events in Eastern Europe and U.S. economic factors. Yesterday, EUR/USD rose to just shy of 1.14 and we open around 1.1350