Sterling made advances against the US Dollar following the release of some disappointing economic data from the world’s largest economy. There was no major data released for the UK with watchers keeping a close eye on the ongoing political situation for PM Johnson and today’s Bank of England (BoE) meeting.
The market has fully priced in a rate hike of 25 basis points to 0.50%, the first back-to-back increase since 2004. Markets will also be looking for confirmation that the Bank will stop reinvesting maturing assets purchased under its QE programme, in effect, to start winding down the balance sheet. If there is a hike, the market reaction will be dependent on the medium-term guidance and overall policy stance. There the central bank faces several challenges, and it is a fine divide between managing inflation and slumping growth. The rhetoric will be monitored for clues on what the projected path of interest rates and inflation will be moving forward. The BoE previously mentioned that peak inflation will be circa 7% at the start of the second quarter. There are also expectations that Chancellor Sunak will announce government measures to curb the forthcoming jump in retail energy prices.
Money Markets Pricing in July Rate Hike
Eurozone CPI inflation increased to 5.1% for January up from 5.0% previously according to Eurostat’s first estimates, significantly exceeding the consensus forecast of 4.4% and the highest Eurozone inflation has been since its formation. The rise was mostly induced by higher energy and food costs, with energy 28.6% higher. Stripping those components out, core inflation read at 2.3% marginally down from the 2.6% in December. The higher-than-expected CPI reading provides a difficult backdrop for the European Central Bank (ECB) who meet this afternoon to vote on Eurozone monetary policy. ECB President, Christine Lagarde, continues her rhetoric that Eurozone inflation will retreat as energy costs correct and supply chains issues ease.
Following the inflation reading yesterday, money markets have revised forward their bets of an ECB interest rate hike from September to July this year. Traders are pricing in a 10 basis-points hike in the base rate as pressure mounts on the central bank to control inflation.
Looking ahead at today, ‘Super Thursday’ headlines with the ECB meeting at midday to vote on monetary policy. The expectation is for the ECB to keep interest rates on hold but given the revision in expectations that the central bank will hike rates in July, the associated press conference will attract significant attention to see whether President Lagarde continues with her rhetoric of 2023 rate hikes.
US Dollar Softens Ahead of Central Bank Meetings
The greenback lost ground yesterday against a basket of major currencies including Sterling and Euro, as markets look ahead to today’s policy announcements from the BoE and ECB. Markets are anticipating a more hawkish outlook from both sets of policymakers as a response to curbing the persistent higher rate of inflation across both regions. The Dollar started yesterday on the back foot and came under early selling pressure after Federal Reserve (Fed) officials pushed back against the speculation of a 50-basis point hike in March
The Dollar was further limited later in the day following the release of the weaker than expected ADP jobs report. The report fell short of expectations at -301k against a consensus forecast of 185k. The reading weighed heavily on the Dollar following Fed Chair Powell’s comments that a strong labor market provides the Fed with capacity for rate increases in 2022. The reading is often considered a precursor to the non-farm payrolls data set for release on Friday.
Looking ahead to today it’s a quiet day for economic data releases as central bank meetings elsewhere takes centre stage. Later in the day, weekly initial jobless claims data, December’s Factory Orders and January ISM Services PMI are scheduled to be released.
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