Sterling has opened softer this morning as the market gears up for the Bank of England’s interest rate decision at 12pm today. The central bank looks set to raise interest rates for the fourth time since December, the fastest increase in the base rate in a quarter of a century, as it attempts to battle soaring inflation currently sitting at 7% – more than three times its target – and still rising. Despite this, sterling has faltered as the BOE must tread carefully to avoid a recession in a nation that is increasingly strained by a cost-of-living crisis. Last month, BOE Governor Andrew Bailey said he and his colleagues were walking a “very tight line” to steer the world’s fifth-biggest economy through the global post-pandemic inflation surge which has been aggravated by Russia’s invasion of Ukraine. The market will watch eagerly for any cues on future guidance in the Governor’s speech today at 12:30pm.
The euro gained around 1% against the dollar yesterday following the Federal Reserve’s interest rate meeting but has retreated in the European session. The single currency remains heavily weighed by the negative fallout from the Ukraine conflict. According to the International Monetary Fund, eliminating reliance on Russian energy would reduce EU growth by 3% in 2023. This followed news that an agreement on reducing Russian oil imports is expected this week, which has led to worries that Russia could retaliate by restricting gas exports to the bloc and in turn deepening the energy crisis. Meanwhile, data this morning showed German Factory Orders fell sharply in March, suggesting that the manufacturing sector of Europe’s economic powerhouse is seeing a fresh downturn. Contracts for goods ‘Made in Germany’ declined by 4.7% on the month versus -1.1% expected and -0.8% previous.
The dollar experienced a flash selloff on Wednesday when the Federal Reserve raised US interest rates by 50 basis points to 1%. Despite this being in-line with market expectations, the central bank then proceeded to pour cold water on the idea that larger hikes could lie ahead. In the news conference following the Fed’s policy statement, Fed Chair Jerome Powell explicitly ruled out raising rates by 75 basis points at the next meeting. In spite of this, Powell made clear that this year’s rate increases were “not going to be pleasant” as he warned they will force Americans to pay more for home mortgages and auto loans, and possibly dent asset values. The news initially saw the dollar index topple by 0.9% from a near two-decade high to 102.45, with it now settling at a one-week low. The market now awaits today’s data to gauge the economic environment, with the release of the weekly Initial Jobless Claims and the Unit Labor Costs data for the first quarter.
11:30 ECB’s Lane speech
12:00 GBP BoE Interest Rate Decision
12:30 GBP BoE’s Governor Bailey speech
13:30 USD Initial Jobless Claims
13:30 USD Unit Labor Costs (Q1)