Sterling firmer this morning

The dollar was on the front foot yesterday amid rising US bond yields. Firmer than expected UK inflation data released this morning has helped sterling regain some ground against the US currency to trade at around $1.2670, with the pound also stronger against the euro at 85.8p. The single currency is down the best part of a cent against the dollar from yesterday morning’s levels at about $1.0870.

There was a notable increase in US yields yesterday, with both 2- and 10-year yields rising by around 10bps. UK yields were broadly flat yesterday but have jumped at the start of play today on the back of the inflation data, while German yields are edging high this morning.

Comments by Fed member Waller added to the move up in US yields. While he acknowledged that the Fed should “be able to lower (interest rates) this year” given the progress made in reducing inflation, he also cautioned that they should be lowered “methodically and carefully”, saying he sees “no reason to move as quickly or cut as rapidly as in the past.”

Christine Lagarde says it is likely the ECB will cut interest rates in the summer, but adds that there is still “a level of uncertainty” about the outlook for inflation while also pushing back on  market expectations for “aggressive” rate cuts.

The annual rate of headline CPI inflation in the UK nudged up to 4% in December (3.8% expected) from 3.9% in November, while core inflation was unchanged at 5.1% (4.9% expected). Services inflation – which the Bank of England is closely watching – edged up to 6.4% last month from 6.3% in November.

There is plenty of US economic data due today including retail sales and industrial production, while we also get a final rate reading of Euro area inflation in December. There are also plenty of ECB/Fed members due to speak over the course of the day.