Further BoE Rate Hikes Priced In
Sterling didn’t muster support from the higher than expected UK inflation data as markets have already priced in further Bank of England rate hikes. Chancellor Rishi Sunak announced a 5p per litre reduction in fuel duty and also announced he was cutting taxes with a substantial increase in the National Insurance threshold of £3,000. There were no other significant measures aimed at helping households.
The Office for Budget Responsibility downgraded the 2022 outlook substantially with UK GDP increasing by 3.8%, down from 6.0% forecasted previously. For the following two years, forecasts are now 1.8% and 2.1% respectively. Given high inflation, the OBR also stated that real living standards are set to decline 2.3% for 2022/23, the sharpest decline on record.
EUR/USD remains pressured for the second consecutive day, sidelined near daily low of late. Risk-aversion, firmer yields underpin USD strength ahead of a long day. EU/US Markit PMIs for March precede US Durable Goods Orders for February to decorate the calendar.
GBP/USD is trading lacklustre around 1.3200 as investors await the outcome of the NATO meeting. The cable faced intensified selling pressure on higher UK’s CPI print at 6.2%. The BOE may resort to a fourth interest rate hike to contain the inflation mess.
Assuming the market retains its expectation that energy black-outs and stagflation will be avoided in the eurozone, GBP/EUR is likely to avoid another rise towards highs close to 1.2190 and should head lower towards the middle of the year.