Skip to content

Sterling Loses Ground on Dovish Hike

On Thursday, the bank’s Monetary Policy Committee (MPC) voted 8-1 to hike rates by 25 basis points with Cunliffe dissenting and calling for no change. There were, therefore, no calls for a 0.50% hike at this meeting but they issued a cautious set of guidance regarding the need for further interest rate rises. The Bank of England (BoE) is also uneasy over the growth outlook with a squeeze on incomes. The Bank said further hikes were needed but cautioned the market’s expectation for the bank rate to be at 2.0% by year-end was extreme, sending interest rate markets and Sterling exchange rates lower as investors recalibrated. The bank stated the need for modest tightening “may be appropriate” in the coming months which is a change from the language used in February when it said some further modest tightening was “likely to be appropriate”

In the aftermath of the decision, rate markets now expect the Bank to deliver four more 25bp hikes at consecutive meetings up until September with another in early 2023.

Sterling lost ground following the dovish commentary. The market will now focus on the inflation data and Spring Budget Statement next week. The market will be keen to see if the Chancellor will implement any measures to ease the squeeze on incomes.

Markets Continue to Digest the Federal Reserve’s Rate Announcement

The US dollar remained on the back foot yesterday as investors continued to digest the impact of the Federal Reserve’s (Fed) measured move to tighten policy by raising US interest rates by 25-basis points. Following the announcement, Fed Chair Jerome Powell signaled the equivalent of a quarter-point rate hike at each of its six remaining meetings this year, while keeping an eye on inflation and commodity prices.

The Fed also downgraded its GBP estimate for 2022 to 2.8% which was down from the previous estimate of 4% expansion. Meanwhile, investors’ mood remained cautious due to a negative shift which saw the US Dollar continue to trade close to the 98.00 level as Russian and Ukrainian officials noted there was no significant progress in negotiations and reports there remains a large gap between requests on both sides. Elsewhere yesterday, the Dollar was mildly supported by the release of industrial production data for February which reported an increase of 0.5% growth month on month and following a 1.4% rise in January.

Looking ahead to today, investors will review February’s home sales data on a light economic calendar. A couple of Fed officials are due to speak later in the session providing fresh clues following the latest rate moves. However, the direction for the Dollar will continue to center on headlines surrounding geopolitical developments.

Single Currency Rises With Inflation a Hawkish Rhetoric.

The single currency made ground against both Sterling and the US Dollar. The February eurozone CPI inflation rate was revised slightly higher to 5.9% from 5.8%. European Central Bank (ECB) President Lagarde stated that inflation is increasingly likely to stabilise at 2% over the medium term whilst also stating that they stand ready to adjust policy in a timely fashion should it see risks of excess inflation extending into the medium term.

There was a slight shift in interest rate expectations with markets pricing in 50 basis points of rate hikes by the end of 2022 from 45 basis points on Wednesday.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).