Pound attempts 1.4000 ahead of Bank of England meeting
Sterling held firm but failed to make further progress before the market open yesterday and the Euro prevented a move above the 1.1695 level. After Wall Street opened, around lunchtime, the Pound due to concerns that the EU threatened to ban vaccine exports from the area (to the UK) and cause significant damage to our vaccination programme. Foreign Secretary Dominic Raab stated that he “expected contracted vaccine supplies to be respected”. As the market drew to a close confidence dropped on evidence that supply difficulties would cause a slowdown in vaccination rates in April.
Following the US interest rate decision Dollar weakness dominated and Sterling pushed close to 1.3950 but the Euro strengthened to push close to 1.1630. Risk appetite was helped by Fed policy of low interest rates which provided some Sterling support.
The Pound is firm again this morning as it attempts to break the 1.4000 mark against the Dollar and the Euro has slipped back to around 1.1680. Markets expect that the Bank of England will adopt a cautiously optimistic tone in its policy statement, but potentially push back against any expectations of rate increases.
The Federal Reserve (Fed) held interest rates at 0.25% and made no changes to the US bond buying programme. Both decisions were in line with consensus forecasts and with unanimous votes. There was a sharp upgrade to the 2021 GDP growth forecast to 6.5% from 4.2% previously with unemployment also expected to decline sharply.
There was a big focus on the dot plot of individual Fed Funds rate projections. Although seven members expected rates to be increased in 2023, the median projection for rates was still unchanged, contrary to market expectations that there would be a shift to forecasting a rate hike.
Fed Chair Powell reiterated that the central bank is strongly committed to achieving its goals and will continue to provide support for as long as needed.
Powell expects inflation increases to be transitory and would not spark a policy change, but did note that there could be some upward pressure on prices as the economy continues to re-open. He also stated that the only way to build credibility surrounding the average inflation target was by doing it.
The rate projections triggered sharp dollar losses and there was no recovery as Powell maintained a dovish stance.
The Euro edged lower overnight and into this morning and was last seen trading near the lower end of its daily range, just above the 1.1950 mark against the Dollar.
The FED announced its policy decision on Wednesday and stuck to its ultra-dovish tone, reiterating they were in no rush to raise interest rates through to at least 2023. The announcement triggered a massive US Dollar sell-off and assisted the EUR/USD pair to rally from low 1.1900s to the 1.1985 region.
Meanwhile, concerns that the suspension of the COVID-19 vaccine in Europe will hinder fragile Eurozone economic recovery further held bulls from over optimism. That said, any further slide is likely to remain limited ahead of the ECB President Christine Lagarde’s scheduled speech later this morning.
Data to watch
07:00 – EUR – ECB President Lagarde Speaks
08:00 – GBP – MPC Official Bank Rate Votes
08:00 – GBP – Monetary Policy Summary
08:00 – GBP – Official Bank Rate
08:00 – GBP – MPC Asset Purchase Facility Votes
08:30 – USD – Philly Fed Manufacturing Index