Interest rates trends remained the dominant influence over the week as markets continued to assess monetary policy trends in the major global economies. As expected, the ECB increased interest rates by 0.25% to 2.50% during the week, the second increase in three months.

In the news conference following the decision, the ECB revised up its growth and inflation forecasts for the next two years while warning that monetary policy was still accommodative even after the most recent rate increase. In response to the ECB stance, the Euro pushed back above the 1.20 level against the dollar as Euro-zone bond yields increased to a five-year high. The Euro-zone data remained firm with significant increases in the PMI indices for the manufacturing and services sectors while there was a significant increase in business confidence. Lending data also remained strong with particular strength in property lending and the Euro held above 1.20 in early New York on Friday. The US data had a mixed tone over the week and failed to offer conclusive evidence on the economy.

There was a drop in new and existing home sales for January despite the warm weather and there was also a significant drop in consumer confidence. Jobless claims data increased over the week to 294,000 from 279,000, but remained low in historic terms. The Chicago PMI index fell significantly in February, but the national index recorded an improvement to 56.7 in February from 54.8 in January which lessened the near-term concerns over US growth trends.

US interest rate futures did not move significantly over the week with markets still pricing in around a 70% chance that the Federal Reserve will push short-term interest rates to 5.0%. There was a rise in long-term bond yields over the week with 10-year yields pushing to near 4.65%.

Japanese monetary policy remained an important focus during the week with increasing speculation that the Bank of Japan was moving close to abandoning the quantative policy. There was also evidence of reduced government opposition to a tightening during the week as the central bank and Finance Ministry looking at the next policy stage.

The consumer inflation data reported a core increase in prices of 0.5% in the year to January, the third consecutive increase, and this reinforced speculation that the central bank would move to end the current policy as sustained price rises were a key condition. The Bank of Japan made a commitment to keeping interest rates low while the government continued to promote the introduction of an inflation target.

The yen attacked levels towards the 115.50 level against the dollar during the week, but investor confidence in selling the yen recovered slightly with a reduction in position closure over the second half of the week. This helped prevent yen gains through 115.50 against the dollar with the dollar pushing back to near 116.50 and the improved risk appetite also led to a recovery for the Australian and New Zealand dollars.

The UK data was mixed over the week, maintaining the recent pattern of UK releases. There was slight drop in the CIPS index for the manufacturing sector and the latest CBI survey reported weak figures for retail sales and confidence.

There were, however, strong figures for mortgage lending which will sustain confidence in the housing sector and the CIPS index for the services sector recorded a significant increase in February to 58.9 from 57.0, the highest level for close to two years. Sterling pushed to highs near 1.76 against the dollar, but weakened to lows around 0.6865 against the Euro.