BoE as expected/ECB policy shift unexpected
Sterling held a firm tone into the Bank of England policy decision as the Monetary Policy Committee (MPC) increased interest rates to 0.50% from 0.25% and the first back-to-back increase since 2004. The rate decision was in line with expectations, but there was a big surprise with the 5-4 vote split as four members of the committee voted for a more aggressive rate increase to 0.75%. The bank also upgraded its peak inflation forecast to 7.25%.
Governor Andrew Bailey followed the rate hike with comments stating further modest rate increases were likely over the coming months, whilst also warning of a severe squeeze in consumer spending.
Shortly after the BoE’s announcement, the pound fell sharply against the Euro after the European Central Bank (ECB) delivered a dramatic shift in stance at its February policy meeting. The ECB signalled concerns that inflation was now expected to run hotter than was previously the case and that a fundamental shift in thinking with regards to policy could take place at coming meetings.
In level terms, GBP/EUR opens just over the 1.1850 whilst Cable (GBP/USD) trades just shy of the 1.36 mark. A firmer EUR/USD has really kicked on and starts this Friday circa 1.1450 following the chance in stance by the ECB.
Datawise, US labour market data for January being the main highlight. The release poses some event risk for the dollar with consensus for a modest 150k rise in payrolls, while the jobless rate is projected to be unchanged at 3.9%.