It’s not often that a rate hold is hawkish but the rhetoric from President Lagarde has given the market hope that sometime this year there will be a response to the inflation. With the euro ripping higher the US dollar index was the main loser who helped keep the pound higher after the Bank of England fulfilled market expectations.
Today the Bank of England Monetary Policy Committee unanimously voted to raise the official bank rate by 25bps to 0.50%. In the speeches after the rate decision, Governor Bailey said that he doesn’t think the bank's failure to raise earlier will make them move further and faster to get inflation down. On the subject of inflation, Bailey said the MPC needs to focus on the inflation objective and that the impact of rising inflation on wage bargaining is important as the demand for workers remains robust and the job churn is elevated. The MPC’s outlook is one of high uncertainty and the downside risks are expected in the medium term.
The pound responded as expected with the GBPUSD raising again today above the daily 200-period EMA. I am expecting a test of the previous swing high and for momentum to now carry Cable out of the descending channel bar any changes to the UK economic outlook or political landscape.
The ECB also offered no real surprises as they kept the deposit rate at -0.50% and reaffirmed that they expect the net asset purchases to end before they start hiking rates. The lack of Hawkish surprise put the EURUSD lower initially, but the subsequent press conference started and the moves reversed with the euro reaching the 1.14500 price level.
Whether it was the lack of the “2022 rate hike is unlikely” wording or the opening remark of the economy is continuing to recover, and the labour market is improving we’ll never know as we don’t own the algo’s, but it was perceived to be more Hawkish by the markets so hence they bid the euro and German bund yields higher. The ECB will maintain flexibility, but they see the economy muted in the first half of 2022. President Lagarde did say that the ECB is getting much closer to target inflation and that inflation might be significantly higher than expected, which certainly opens the door to a rate hike after a recalibration in March. So basically, after the Fed has done their first hikes, assuming they do.
In the US session, the US Markit Composite Final PMI for January came in above expectations at 51.1, the US ISM Services PMI for January came in just above expectations at 59.9 but factory orders month on month came in worse than expected and lower than the previous reading.
Shares of Meta Platforms Inc. previously known as Facebook, plummeted as much as 26% today following the company's earnings release the day before. This set the tone for the US indices which then brought down the global indices. The worst performer at the time of writing was the Nasdaq which was close to -3% lower.
The forex heatmap at the London close shows the euro is clearly the strongest currency relative to the others with the yen the weakest. The Kiwi has done well to stay strong against its peers as did the pound. There is no real sense of risk-on or off currently so we’ll have to wait to see how London opens next week once we have digested the NFP numbers due tomorrow.