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Sterling Slides On Surprise Decision Not To Raise

Sterling moved over 1.5% from the highs yesterday following the surprise decision not to raise interest rates. There was a 7:2 majority that voted in favour of keeping the bank rate at 0.10%, with Messrs Ramsden and Saunders the lone voices calling for a 15 basis points (bp) increase to 0.25%. This was particularly surprising as expectations of a hike had been fuelled in large part by hawkish comments from Governor Bailey and Chief Economist Pill that some action is likely required in response to the ongoing rise in inflationary pressures. In addition, their speculation that the Bank of England (BoE) would start scaling back on some of the emergency stimulus measures, however, they opted to leave this policy unchanged. The majority felt that there continued to be value in waiting for additional information, particularly the initial impact of ending the government’s furlough scheme at the end of September, before deciding whether a tightening in monetary policy is warranted.

Despite the lack of rate hike, the market still envisages the bank rate rising to 1% by the end of 2022 as the BoE’s inflation forecast remains elevated. The BoE now expects Consumer Price Inflation (CPI) to peak at around 5% in April 2022 and continue to caution vigilance over the extent to which higher inflation output spills over into higher medium-term inflation expectations.

Attention to US Non-Farm Payrolls Data Following Federal Reserve (Fed) Tapering Announcement

The US Dollar remained well supported against several major currencies yesterday following the Fed’s announcement to begin tapering its $120 billion bond-buying programme on Wednesday. Fed Chair Jerome Powell commented that the speed at which the Fed will taper will be determined on how economic conditions unfold while continuing to adopt a cautious approach. In response to market participants expecting a rate hike in July 2022, Powell commented that it’s too early to speculate on further monetary policy tightening at this stage as they had not yet met the next steps beyond the requirements to begin tapering. The US Dollar index which tracks the US Dollar against a basket of six other currencies reached fresh multi-week highs of 94.50.

Wrapping up a busy week, markets will await the monthly US jobs report later today for further guidance on the pace of economic recovery. Consensus forecasts have pointed towards 425k new jobs in October, compared to 195k additional jobs added in September.

Focus Remains On Economic Data With European Central Bank (ECB) Expected To Keep Monetary Policy Unchanged

Yesterday, we saw the German Factory Orders Month-on-Month (GFO MoM) read slightly below forecast at 1.3% (versus a forecast of 1.7%) but representing a healthy increase from the -8.8% the previous month. Although not a significant mover for currency markets, it is a leading indicator of production in the EU’s largest economy. Elsewhere, we had Eurozone Services Purchasing Managers’ Index (PMI) revised marginally lower to 54.6 from the flash reading of 54.7.

Looking ahead to today, we have already seen German Industrial Production Month-on-Month (GIP MoM) figures read lower than forecast at -1.1% versus a forecast of 1.1%. Like Factory Orders (FO), it is not a huge mover for the Euro but is a leading indicator of economic health in Germany. In addition, we have European Retail Sales Month-on-Month (ERS MoM) due this morning. The expectation is retail sales to read 0.2%, marginally lower than the 0.3% reading the month prior.

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