GBP

Sterling remains under pressure this morning after a volatile trading day on Thursday. The pound rallied after the Bank of England raised interest rates as expected, however those gains were short lived after the European Central Bank signalled to the market the possibility of rate hikes later this year. The Bank of England’s decision was somewhat of a surprise, as four of the nine policymakers wanted a bigger increase to contain price pressures which the central bank warned would push inflation above 7%. After the announcement sterling briefly touched a 2 year high against the euro, however the pound’s momentum stalled when during the press conference which followed the rate decision, Governor Bailey sounded very cautious on the economic outlook, and it fell aggressively following the ECB’s press conference. Brexit headlines were also a concern for sterling as Northern Ireland’s first Minister Paul Givan resigned in protest at the post-Brexit trade rules and Franziska Brantner from Germany’s Economic Ministry warned the UK to abide by Brexit rules or face consequences.

EUR

The euro surged yesterday when the European Central bank finally acknowledged mounting inflation risks and increased expectations of an interest rate hike this year. The ECB has long argued that high inflation will fall back below its 2% target later this year, but after a string of high inflation readings within the bloc, they appear to have changed that narrative. In her press conference when asked about record eurozone inflation, ECB President Christine Lagarde said “compared with our expectations in December, risks to the inflation outlook are tilted to the upside and price growth is becoming more broad based”. While Lagarde said the ECB would not rush into any move, she declined to repeat her previous guidance that an interest rate increase was “very unlikely”. The single currency rallied over 1% against both the dollar and sterling following her remarks and has continued its momentum this morning.

USD

The dollar remains on the backfoot against the euro in early trading. The dollar index is trading without any clear direction after losing 0.7% following Christine Lagarde’s hawkish comments yesterday. Key employment data due for release later today will likely dictate the greenback’s moves. January’s non-farm payroll report is expected to rise by 150,000 following December’s disappointing increase of 199,000. Traders will also keep a close eye on the wage inflation reading due at the same time.

Economic Calendar

13:30pm USD Non-Farm Payrolls (Jan)
13:30pm USD Average hourly earnings (Jan)
13:30pm USD Average weekly earnings (Jan)