The latest UK consumer inflation data will be watched closely on Tuesday

The latest UK consumer inflation data will be watched closely on Tuesday and a lower than expected reading would dampen expectations surrounding the need for higher interest rates while any move in the headline rate to 2.0% or higher would increase speculation that the Bank of England could be pushed towards an earlier than expected tightening.

 

Sterling was able to hold above the 1.2500 level against the dollar on Tuesday with a firm underlying tone.

NY Federal Reserve notes increase in inflation expectations

EU Commission revised its 2017 Euro-zone GDP growth forecast

The EU Commission revised its 2017 Euro-zone GDP growth forecast marginally higher to 1.6% from 1.5% previously, although this was still lower than the 2016 outcome and the underlying tone remained generally downbeat with a high degree of uncertainty over both domestic and US developments.

 

The inflation forecast for this year was revised higher to 1.7% from 1.4% previously, but with an expected slowdown to 1.4% in 2018 and still below the ECB target

Sterling fails to make headway against dollar

Sterling was unable to make any headway against the dollar during the European session on Monday, but it was able to strengthen against the Euro for the sixth successive session as the single currency dipped to lows around 0.8460.

 

According to data from Visa, UK consumer spending slowed to a five-month low of 0.4% in January from 2.5% in December, maintaining expectations that underlying consumer spending will slow during 2017.

 

The latest UK consumer inflation data will be watched closely on Tuesday and a lower than expected reading would dampen expectations surrounding the need for higher interest rates while any move in the headline rate to 2.0% or higher would increase speculation that the Bank of England could be pushed towards an earlier than expected tightening.

 

Sterling was able to hold above the 1.2500 level against the dollar on Tuesday with a firm underlying tone

The EU Commission revised its 2017 Euro-zone GDP growth forecast marginally higher

The EU Commission revised its 2017 Euro-zone GDP growth forecast marginally higher to 1.6% from 1.5% previously, although this was still lower than the 2016 outcome and the underlying tone remained generally downbeat with a high degree of uncertainty over both domestic and US developments.

 

The inflation forecast for this year was revised higher to 1.7% from 1.4% previously, but with an expected slowdown to 1.4% in 2018 and still below the ECB target.

One-year inflation expectations rose to 3.0% in the latest survey from 2.8% previously

According to the New York Federal Reserve, one-year inflation expectations rose to 3.0% in the latest survey from 2.8% previously and the highest reading since the middle of 2015.

 

Inflation expectations will be an important element of Fed thinking over the next few months, especially as the FOMC had worried previously that low expectations would prevent a rise in the inflation rate. Dallas Fed President Kaplan stated that the Fed should raise interest rates again sooner rather than later with rates increasing in a gradual and patient manner.

The dollar’s trade-weighted index hit the highest level for over three weeks and the Euro dipped to test support below the 1.0600 level as strong risk appetite curbed Euro support.

 

Commentary from Fed Chair Yellen will be watched very closely on Tuesday with markets currently putting the chances of a March interest rate increase at around 22%.

 

Any hints of a March hike would provide further net dollar support as the Euro edged back above 1.0600 on a wider US retracement.