By Dhara Ranasinghe

Dhara Ranasinghe gives us a look at what lies ahead for the markets.

Flash inflation on Wednesday will put the European Central Bank’s plans to stop using monetary stimuli to their advantage to the test.

Reuters polled economists to forecast that inflation would rise 4.4% in January, compared with a year ago. This is a decrease from the record-breaking 5% in the month before.

As the inflation peak is expected, a smaller decline in bond yields could lead to a rise in both the euro or the dollar across the currency bloc. The ECB is meeting this Thursday and will monitor market movements as well as the data.

Notably, the German Inflation figures for Monday showed a slight slowdown in January. However, the print was well ahead of expectations and far above the ECB’s 2% target to the entire euro area.

The normally sluggish short-end of the German bond market has seen a resurgence in rate-hike expectations. There have been almost three rate hikes of 10 basis points by the year’s end.

The two-year bond yields are at -0.47% today, the highest level since April 2016. It’s an increase of 14 basis points this week. GRAPHIC: Rate-hike talk lifts euro, bond yields, https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgjdkypb/morningbid0202.PNG

The bulls have returned to power in the stock market, supported by strong earnings.

Google parent Alphabet (NASDAQ:) Inc reported record quarterly sales late Tuesday. Just recently, Santander in Spain (MC:), reported an 8x increase in its Q4 net profit over the previous 2020 quarter.

It’s not surprising then that European stock futures have risen 0.5-0.6%. Wall Street’s futures also point to a positive start later in today. On Tuesday, the volatility index rose to almost 40%.

Oil prices retraced to last week’s seven year highs, as a draw on stocks indicated strong demand, and a shortage of supply. Investors remained cautious however, ahead of the OPEC+ meetings later that day.

On Wednesday, key developments should give more direction to the markets:

– Sony (NYSE:) Record 32% increase in operating profit for Q3

Santander Q4 Net Profit Rises 8-fold and Santander releases 750 Mln Euro Provisions

U.S. January ADP Employment Change

– Central Bank of Brazil Monetary Policy DecisionEarnings Meta, AbbVie, Novo Nordisk, Thermo Fischer Scientific, Thermo Fisher Scientific, Thermo Fisher Scientific, Novartis Qualcomm (NASDAQ)), T-Mobile US, Santander. Spotify (NYSE :).