Central bankers and politicians at odds over inflation control onus
Consumer price inflation is high right around the globe, driven by the pressure on energy prices and raw materials as a result of the Ukraine invasion and the sanctions against Russia. The net result is that most countries that rely on imported goods in any shape or form are finding the consumer prices being driven higher. What to do about it? That is the question. It’s a question that is dividing central bankers and politicians who each seek to command the other to control the problem. We can see that in the UK where some government ministers are disappointed with the Bank of England’s response and we can see in Europe where Pablo Hernandez de Cos, the Bank of Spain Governor is telling politicians that it is not up to the ECB to tackle diverging inflation rates. The debate in the UK moves to the committee rooms in the Palace of Westminster today when the BOE will be challenged over its response to inflation during the Monetary Policy Report Hearings. Sterling traders will be watching closely. Euro traders will be tuned in to the European Commission’s economic growth forecasts which are also due for release today.
GBP poised for potential gains ahead of a data-heavy week
In the midst of heavy safe-haven buying of the US dollar and, to a lesser degree, the Japanese Yen, sterling has held its ground rather well. That support for the Pound will be tested this week because we are awaiting data on employment and income levels, both consumer and producer price indices, consumer confidence and retail sales data. Add in the aforementioned BOE hearing and the summit to try to resolve the Northern Ireland border dilemma and the scene is set for a busy week for Sterling. We start that week with a Pound buying USD 1.2225 and EUR 1.1760 at the interbank level. Both of these rates look fairly stable in the calm before the storm but tin hats on and flak jackets at the ready.
USD supported but stalled
Having stormed to some long-term levels of strength against the pound, the euro and the Japanese yen, The US dollar has stalled. That is partly on profit-taking because the moves have been significant, and partly due to the uncertainty over whether US Federal Reserve will accelerate its drive to control inflation. the US is no different to Europe or Britain in that politicians are looking for the Federal Reserve, America’s central bank, to get a grip on inflation whilst not damaging the tentative recovery. We don’t have any tier one U.S. data today but we will see their retail sales data tomorrow and some housing data on Wednesday. Thursday will bring the usual weekly jobless claims data but it is the Federal Reserve and Commodity Prices that will most heavily influence the US dollar this week. This morning the EURUSD exchange rate has recovered a little from the low we saw last Thursday. That pair is above $1.0420 this morning in the interbank market.
Euro steady ahead of GDP and Lagarde speech
I mentioned the European commission’s economic growth forecast report above that is the only significant story that we know will affect the euro today. However, traders may try to keep their powder dry ahead of tomorrow’s eurozone gross domestic product data for the first quarter of the year and a speech from the President of the European Central Bank, Christine Lagarde. It is tough for ECB at the moment. With war on their border and the inevitable supply and inflation problems that come from closing trade links with Russia, the ECB has a lot to contend with above and beyond the problems other central banks are facing. The fear of a global recession is real, so raising interest rates to curb inflation could well exacerbate any slow down or contraction of the economy. So it will be very interesting to see where the GDP for quarter one is still at the estimated 5% for the year and what Christine Lagarde has to say about the ECBs decision to keep interest rates in negative territory.