Sterling initially got a boost against the US Dollar but fell against the Euro following the respective central bank meetings. As expected, the Bank of England (BoE) raised interest rates by 25 basis points to 0.50%. In a surprise split decision, four of the nine members of the Monetary Policy Committee wanted to raise interest rates by 50 basis points to 0.75%, which would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago. The majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase. In the meantime, the BoE said it would begin to unwind its asset purchases next month. These have been accumulated over the last decade in attempts to stimulate the economy in a process known as Quantitative Tightening (QT).
The BoE said consumer price inflation – which stood at 5.4% in December – now looks set to peak at around 7.25% in April, which would be the highest rate since the recession-ravaged early 1990s and miles off its 2% target.
The BoE have the unenviable task of setting policy in an unprecedented time – increase rates too quickly and they risk impacting growth, increase too slowly and inflation becomes more embedded. The market will be watching economic data to try and second guess the pace of the hiking cycle for the remainder of the year.
Set for release this morning we have the UK PMI Construction data whilst eyes will closely monitor the ongoing stresses that PM Johnson continues to face.
Eurozone Money Markets Decipher Hawkish Tone
The European Central Bank (ECB) kept monetary policy on hold yesterday, keeping interest rates at 0.0% despite growing inflationary pressure in the Eurozone. The ECB decision was largely anticipated by money markets who have now revised forward their bets for an initial 10-basis point hike from September to July this year as pressure mounts on policymakers in the months ahead to curb stimulus.
During the associated press conference, ECB President Christine Lagarde commented that with the upside [in inflation] seen in December and January that there was concern within the council and that the Eurozone is no longer in a low inflation environment. Lagarde was pressed on whether the ECB now foresees a rate hike in 2022, but interestingly she did not repeat the rhetoric that a rate hike was “very unlikely” with markets deciphering a more hawkish tone.
Looking at market expectations, there appeared to be a shift in yield expectations with money markets betting on base rates reading 0.5% at the end of 2022 from a previous expectation of 0.10%.
Looking ahead at today, German Factory Orders month-on-month surprised to the upside reading 2.8% versus an expectation of 0.4%. Elsewhere, European Retail Sales are expected to show a -1.0% contraction for January.
US Dollar Posts Largest Weekly Fall Since March 2020
The US Dollar weakened for the third straight day on Thursday and is set to post its largest weekly losses since March 2020, following hawkish monetary policy projections signalled by policymakers yesterday at the BoE and ECB meetings. The change in momentum for the currency this week follows a two-week rally, driven by investors’ expectations of a more aggressive pace of rate hikes in 2022 and saw the Dollar index fall below 95.50 on Thursday. Earlier this week, markets began to scale back speculation of a 50-basis point hike in March following comments from senior Fed officials on Monday who dampened expectations of a March ‘super-hike’.
Elsewhere yesterday, the Dollar was further weighed down by worse than expected economic data for January. US Factory orders fell more than expected in January by 0.4%, from a month earlier in December and was the first monthly fall since April 2021. Meanwhile, the ISM Services PMI data fell to 59.9 in January, down from 62.3 in December, the slowest growth pace for the services sector going back to February 2021.
Today investors will await the release of the highly anticipated January Non-Farm Payrolls (NFP) data. Updated jobs data is expected to show a rise by 150,000, an increase on December’s lower than expected increase of 199,000 new jobs created. The focus will be given to the wage inflation element of the data, as investors look for any significant change in the average hourly earnings.
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).