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Global equity markets ended lower last week, amid expectations that higher US inflation will prompt Federal Reserve (Fed) to raise interest rates at a quicker than anticipated pace. UK markets ended the week on negative footing, following a decline in housebuilding sector stocks, as the UK construction PMI data indicated slowdown in construction activity in January. Additionally, the nation’s manufacturing PMI declined to its lowest level in seven months in January. Meanwhile, UK’s consumer confidence surprisingly rose in January. European markets ended the week lower, amid losses in energy sector shares. On the data front, the Eurozone’s gross domestic product (GDP) for the fourth quarter and the consumer price index (CPI) for January came in line with market estimates. Additionally, the single currency bloc’s economic sentiment indicator surprisingly dropped in January. US markets ended the week in the red, dragged lower by rising bond yields and as stronger than expected jobs data increased inflation concerns among investors. The Fed stated that it expects inflationary pressures to finally pick-up this year and stabilise around its 2.0% goal. Further, it hinted at further gradual interest rate hikes, citing robust economic growth and solid labour market conditions. On the data front, private payrolls in the US grew more than expected in January and the nation’s manufacturing sector surprisingly expanded in January. The unemployment rate in the US remained unchanged in January and non-farm payrolls advanced more than market expectation. Asian markets closed lower last week, mirroring their US peers.

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Currency Update

The EUR ended higher against the USD, amid increasing investor optimism over Eurozone’s economy. In economic news, the unemployment rate in the Eurozone remained unchanged in December. Moreover, the unemployment rate in Germany hit a new record low in January. The GBP ended weaker against the USD, as UK’s manufacturing PMI unexpectedly dropped in January. Meanwhile, the Bank of England’s (BoE) Governor, Mark Carney, stated that the central bank can now focus more on combating inflation and bringing it near to its target with signs of a pick-up in wage growth. The US Dollar ended higher against its key peers last week, on upbeat US economic data and as the Fed hinted at a further gradual interest rate hikes, as it expects inflationary pressures to finally pick up, amid robust economic growth and solid labour market conditions. On the data front, non-farm payrolls advanced more than market expectations in January and ISM manufacturing PMI fell less than expected in the same month.

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Fed hints to increase rates at faster pace

At its January monetary policy meeting, the Fed left its benchmark interest rates unchanged in a range of 1.25% to 1.50%, as widely expected. Further, the central bank stated that inflation on a 12-month basis is expected to move up this year and to stabilise around its 2.0% target over the medium term. Additionally, the central bank hinted at further gradual interest rate hikes, citing robust economic growth and solid labour market conditions.

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The Week Ahead

Going ahead this week, investors will keep a close watch on BoE’s interest rate decision along with its quarterly inflation report. Further, ECB President Mario Draghi’s speech will also be on investors' radar. On the data front, trade data from China, UK, US and Germany along with UK's manufacturing and industrial production will be closely watched for further cues.

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