Sterling benefited from improved market sentiment against the dollar yesterday afternoon and has managed to build on those gains in early trading. The pound rose along with other riskier assets on hopes of a breakthrough in peace talks between Russia and Ukraine when the Financial Times reported that there had been significant progress towards a potential peace deal. Against the euro, sterling remains steady as the single currency also found demand on the headline. Later today, the Bank of England looks set to raise rates for the third consecutive policy meeting, as it tries to curb soaring inflation. All but 5 of 49 economist’s polled by Reuters believe the central bank will increase rates by 25 basis points, back to its pre-pandemic level of 0.75%. Traders will closely watch the policy statement to see how the surge in energy prices caused by the Ukraine conflict has changed future inflation forecasts.
The euro is up nearly a cent against the dollar from yesterday’s close, amid a cautiously optimistic market mood as traders await inflation data for the eurozone in the form of Harmonised Indices of Consumer Prices (HICP) released later today. European Central Bank Governing Council member Francois Villeroy de Gelhau this morning downplayed the risks of recession from Ukraine conflict. Speaking on French television, the Bank of France head said the economic fallout from the war in Ukraine at this stage does not justify a return to “whatever it takes” style policies and a Russian credit default would have very limited consequences for global finance. ECB president Christine Lagarde will be speaking at the Institute for Monetary and Financial Stability (IMFS) in Frankfurt this morning.
Yesterday evening, the Federal Reserve Bank raised interest rates for the first time since 2018. Along with the rate hikes, the central bank also indicated an aggressive cycle of hikes at each of the six remaining meetings this year, pointing to 1.9% rate by the end of the year. Speaking after the 0.25% interest rate rise, Chairman Jerome Powell said the economy is strong enough to weather the rate hikes and maintain its current strong hiring and wage growth and policymakers were strongly committed to not allowing high inflation to become entrenched. As traders were already pricing in a high degree of policing tightening, the dollar failed to make any gains following the meeting and fell along with other safe haven currencies on renewed market optimism.
10:00am EUR HICP Inflation data
10:00am EUR ECB Lagarde Speech
12:00pm GBP BOE interest rate decision
12:30pm USD initial Jobless claims