Last week the key focus was the ECB meeting as the market was keen to decipher their stance given the recent turmoil. In addition, both UK and US data was under scrutiny. Starting with the ECB, the central bank made no changes to interest rates. Bank President Lagarde stated that the overall economic situation is to improve in 2021, but uncertainty remains. Lagarde also noted that the inflation pick-up is mostly due to transitory factors, although projections also see a gradual increase in underlying inflation pressure. The 2021 inflation forecast has been revised up to 1.5% from 1.0% previously, but with only a marginal increase in the 2022 forecast to 1.2% from 1.1%. The Euro strengthens on the back of the meeting as it was less dovish than anticipated.

In the UK, GDP declined 2.9% for January compared with expectations of a 4.9% decline, although there was a sharper than expected decline in industrial production. Overall confidence in the UK economy remained robust with expectations that there would be a strong recovery as lockdown measures are eased. Bank of England Governor Bailey stated that contingency planning for negative interest rates did not imply any intentions for moving in that direction. He added that the UK economy faced two-sided risks to the recovery and that risks were tilted downwards for now, but the risks are gradually diminishing. As far as inflation is concerned, Bailey noted that the rate would increase in the short term and it will be challenging in determining whether any increase in prices is likely to be persistent. Complementing the more optimistic view was the UK GDP 2.9% decline for January compared with expectations of a 4.9% decline.

The US Dollar weakened following inflation figures. US consumer prices increased 0.4% for February after a 0.3% increase the previous month and in line with consensus forecasts. The annualised rate increased to a 12-month high of 1.7% from 1.4%, but core inflation declined by 0.1%. The lower core inflation figures dampened concerns over an increase in inflationary pressure and curbed expectations that the Federal Reserve would have to tighten policy more quickly.

Looking to the week ahead, the key focus will be on the FOMC meeting and the BoE meeting on consecutive days. The roadmap to recovery, rising yields and the interest rate picture will be under scrutiny.

Monday

  • Eurogroup Meeting
  • US Empire Manufacturing

The Eurogroup meeting is set to take place virtually and attended by the Eurogroup President, Finance Ministers from euro area member states. Issues to be addressed will include euro support mechanisms, government finances and the COVID-19 vaccination programs. In the meantime, the US Empire Manufacturing is set for release. This will provide some insight on manufacturing in the New York area as it surveys more than 200 manufacturers.

Tuesday

  • German ZEW
  • US retail sales

Economic data will be monitored from both the Eurozone and US for signs of sentiment and economic activity. The German ZEW surveys 300 German institutional investors and analysts which asks respondents to rate the relative 6-month economic outlook for Germany. The six-month forecast will be closely monitored with the disappointing rollout of the vaccine programme. In the meantime, the US retail sector will be closely monitored with inflationary concerns starting to emerge. Economic activity in consumer spending may be a driver if activity remains elevated.

Wednesday

  • FOMC meeting

The FOMC is set to maintain its ‘status quo’ and reiterate that it is still too early to start talking about cutting back its asset purchases and that a rise in policy interest rates is unlikely for several years. The market will decipher the meeting for the Fed’s sentiment on rising bond yields and its asset purchase programme. In recent weeks, the markets have been discussing the prospect of a rise in policy interest rates sooner than anticipated despite Federal Reserve comments. The market will use this meeting as a clear opportunity to articulate the central bank’s stance.

Thursday

  • BoE Meeting
  • US jobless claims

With the successful vaccine rollout in the UK and the roadmap being laid out by PM Johnson, the market will be keen to articulate the message from the Bank of England. In terms of policy, it is very unlikely that we will see any change in the interest rates of QE. This is not one of the meetings where the BoE updates its forecasts with a new Monetary Policy Report or holds a press conference. However, there will still be a substantive commentary on recent developments in both the press statement and in the Minutes.

Friday

  • UK consumer confidence
  • UK public sector borrowing

With the roadmap laid out for reopening the market, we will be keen to see if consumer confidence has improved in the UK despite the dovish forecast in unemployment rates. Also, the public sector borrowing figures are due for release which is expected to show an increase.

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