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UK inflation is set to peak at 10% says top analysts, delivering a surge in prices that will inevitably hit economic activity and send the Pound lower against the Euro and Dollar in coming weeks. This will squeeze incomes over the coming months and weigh on growth going forward. The UK is a major energy importer which means the effects of the war in Ukraine will be felt through higher heating bills and prices at fuel stations – both of which will impact a large proportion of the economy. Sterling rallied after back-to-back rate hikes from the Bank of England gave investors’ confidence, with the GBP/EUR rate reaching new 5-year highs at the start of March. However, at the occasion of the March rate hike the BoE sounded distinctly more cautious in its approach, warning inflation could snuff out the economic recovery and result in a sharp fall in inflation in coming years. This week’s highlight for the Pound comes on Thursday as GDP figures are released, usually giving a good insight into the state of the economy.
Over the last 10 days the Euro has struggled against both Sterling and Dollar, losing over 1% to both currencies as the war in Ukraine continues to develop. Neither Russia or Ukraine can come to an agreement which would create peace and therefore the bombing continues to rain down across Ukraine. This has impacted supply chains and in turn the Euro, which is causing low growth and high inflation, and any threat to energy supply to Europe from Russia will cause some level of panic in the region. Christine Lagarde is staying firm that it is unlikely the ECB will raise interest rates in 2022 and this has caused much weakness for the Single Currency as the Fed and BoE continue to raise there’s with record high inflation. Lagarde speaks again on Wednesday, and investors will be looking out for any suggestions that this stance may change. Otherwise, the weak is quiet for European data and again the war will continue to dominate market movements.
The Dollar has started the week strong against both EUR and GBP against the backdrop of the lack of progress in the Russia-Ukraine peace negotiations, hawkish Fed expectations continued lending support to the safe-haven greenback. There isn’t any major market-moving economic data due for release on Monday, either from the Eurozone or the US, leaving the pair at the mercy of the USD price dynamics. Hence, traders will take cues from developments surrounding the Russia-Ukraine saga, which, along with the US bond yields, should influence the USD. The focus, however, will remain on this week’s important US macro data, including the closely watched monthly jobs data (NFP) on Friday.