GBP

The pound dropped on Thursday as the Bank of England raised interest rates but sounded more cautious around the pace of further tightening to tackle persistent inflation. The central bank’s Monetary Policy Committee voted 8-1 in favour of raising rates by 25 basis points to 0.75% – the one dissenter voting in favour to keep rates on hold. This was a surprise, as some traders had been expecting at least one of the members to vote for a 50-point hike. Sentiment was further dampened when the MPC stated “some further modest tightening might be appropriate in the coming months” – a more hawkish view than was seen in February’s meeting when tightening was claimed to be “likely”. Elsewhere, UK Chancellor Rishi Sunak told the Financial Times that “an immediate EU-wide embargo on Russian oil and gas imports would cause at least £70 billion of damage to the British economy”. This followed Boris Johnson’s urge to western allies to follow the lead of the UK and US and ban imports of Russian hydrocarbons.

EUR

The euro held on to its weekly gains on Thursday with the continuation of peace talks in Ukraine allowing it to bounce from last week’s near 2-year trough. Despite the continuation of fighting, markets remain buoyant that a peaceful solution can be reached. Yesterday, Turkish President Recep Erdogan told Russian President Vladimir Putin that he could host a meeting between him and Ukrainian President Volodymyr Zelenskyy in Turkey, adding that a permanent ceasefire could lead to a long-term solution. Meanwhile, yesterday’s Eurozone Consumer Price Index for February was finalised slightly higher at 5.9% year-on-year vs 5.8% prior. Despite the concerning increase in consumer prices, ECB President Lagarde assured the market that inflation will stabilise at 2% in the medium term. Concerns were further eased when ECB Chief Economist Philip Lane confirmed that “core inflation is above 2% now but there are reasons to expect it would fade”.

USD

The dollar is headed for its first down week in 6 versus the pound and the euro, as it hit 2-week lows on Thursday. Despite the Federal Reserve’s hawkish signal on Wednesday as it raised rates for the first time since 2018, the dollar’s direction has been dictated by falling risk sentiment due to continued peace talks between Moscow and Kyiv. Progress seemed elusive on Thursday, with US Secretary of State Antony Blinken even suggesting that “Russia may be contemplating a chemical-weapons attack”. However, market fears have been abated as a phone call between US President Joe Biden and Chinese leader Xi Jinping later on Friday has been set. The US are to warn China not to provide support to Russia and to make clear that if China backs Russia, the US will impose “costs”.

Economic Calendar

10:00am EUR Labor Cost (Q4)
13:00pm USD US President Joe Biden and Chinese President Xi Jinping summit
14:00pm USD Existing Home Sales (MoM)(Feb)
18:00pm USD Fed’s Bowman speech