Euro Area to Open Higher in Anticipation of German CPI and UK GDP | Daily Market Analysis

Key events:        

• UK – BoE MPC Treasury Committee Hearings    
• Eurozone – EU Leaders Summit     
• USA – Initial Jobless Claims

Yesterday we could see another day of record highs for the FTSE100, as European markets again outperformed US markets, which bounced back.

While U.S. stocks once again recovered from Fed Chairman Powell's comments on Tuesday, a number of Fed speakers reinforced the hawkish sentiment on Wednesday: Fed Vice Chairman John Williams echoed Powell's comments but went a bit further, saying that rates may have to remain restrictive for several years, a significant change from the recent comments of other Fed policymakers.

He was followed by Minneapolis Fed President Neel Kashkari, who repeated his comments from earlier this year that the Fed needed to see a final rate of 5.4% before pausing, and Governors Christopher Waller and Lisa Cook made their own hawkish comments.

While the impact on yields was fairly small, U.S. markets pulled back from their recent peaks and ended the day lower, with the Nasdaq again being the primary downside driver.

Continued uncertainty about how far central banks should go to raise rates contributes to the volatility between the bullish scenario of an imminent peak in rates and a rate cut later this year and the bearish scenario of a final rate hike followed by a prolonged hold.

Today, attention will shift back to the European Central Bank and its intention to raise rates by 50 bps next month and then by another 50 bps in May.

The delayed release of German CPI for January due to some technical issues with calculations could lead to a quick reassessment of risks when it comes to whether the EU CPI fell as much as last week's flash data suggested.

In contrast to the EU CPI data, the German CPI for January is expected to rise from 9.6% to 10% year-over-year and 1.3% month-over-month. A slip, in either case, could lead to a significant move in the EUR/USD pair, and a soft reading will cause the euro to weaken.

The pound will also be in the spotlight as Bank of England Governor Andrew Bailey will testify to the Treasury Select Committee, along with Chief Economist Hugh Pill, and Jonathan Haskel and Silvana Tenreyro will discuss the latest interest rate decision, with Tenreyro's testimony likely to be most instructive, as she voted to keep rates unchanged.

The U.S. labor market is also back in the spotlight today, with the latest weekly jobless claims data, which fell to 183,000 last week, the lowest level since last April. This week, a modest increase to 190,000 is expected, and continuing applications will total 1.66 million.

In addition, optimism is already in the air that the United Kingdom economy has probably avoided a recession in 2022, giving some respite to the sterling bulls. But will it be enough?

The U.K. avoided entering a technical recession in the third quarter after U.K. GDP growth in the second quarter was revised upward to 0.2% against a preliminary forecast of a 0.1% contraction. A technical recession is defined as two consecutive quarters of negative growth.

The United Kingdom's gross domestic product (GDP) is likely to remain at 0% in the final quarter of 2022, compared to the 0.3% decline recorded in the third quarter. On an annualized basis, the U.K. economy will grow 0.4% in the fourth quarter, down sharply from the 1.9% growth recorded in the previous quarter. Meanwhile, GDP for the month of December is expected to contract by 0.3% compared to the 0.1% recorded in November. UK economic growth data is due out Friday at 07:00 GMT.

GBP/USD is in sluggish recovery mode from a five-week low of 1.1961 ahead of Friday's UK GDP release.

On the expected stagnation in the UK economy, the GBP/USD pair may face a "sell the fact" trade, as the optimism associated with averting a recession seems to have already been priced in by the market this week.