BoE hikes rate 50 basis points to 4.00%.

The Bank of England increased interest rates by 50 basis points to 4.00% at the latest policy meeting, in line with market expectations. There was a 7-2 vote for the decision with Tenreyro and Dhingra again calling for no increase in rates.

The Bank of England is confident that headline inflation will decline sharply, but it expressed reservations over underlying inflation. The bank expects a shorter and shallower recession, but GDP is still forecast to contract in 2023 and 2024 with GDP not regaining the pre-pandemic peak until 2026.

Based on market rates, inflation is forecast to dip to below 1.00% on a 2-year horizon. The bank dropped guidance that it would tighten forcefully if necessary with Governor Bailey not pushing back aggressively to the notion that rates could have peaked.

Sterling overall posted significant losses.

The ECB increased interest rates by 50 points to 3.00% at the latest policy meeting which was in line with consensus forecasts.

Bank President Lagarde stated that the risks to inflation are more balanced than in December. She still expressed concerns over underlying inflation trends and warned that there is more ground to cover. Pointedly, Lagarde also stated that she would not say disinflationary forces are already at play.

ECB Lagarde also stated that the bank’s intention is to raise interest rates by a further 50 basis points at the March meeting.

There were sharp declines in Euro-Zone and UK bond yields following the central bank decisions with optimism that rates were close to a peak.

US 10-year bond yields also declined to 4-month lows below 3.35%.

EUR/USD was unable to hold above the 1.1000 level on Thursday and there was a significant correction after the ECB policy meeting despite ECB comments that rates would continue to increase. The currency was vulnerable to a correction after strong gains.

US and European bourses posted further gains on Thursday amid hopes that interest rates were close to a peak.

There was, however, a significant setback in Asia as the latest earnings data from three US mega stocks failed to meet expectations.

The latest labour-market report will be released on Friday. Consensus forecasts are for an increase in non-farm payrolls of around 195,000 from 223,000 previously with the unemployment rate edging higher to 3.6% from 3.5%.

Average hourly earnings are expected to increase 0.3% on the month and will be important for inflation expectations.

The Euro held firm ahead of the ECB policy decision, but failed to make further headway with EUR/USD close to 1.1000. The Euro was vulnerable to a correction as yields declined after the ECB meeting. EUR/USD dipped to below 1.0900 and settled close to this level on Friday.

The dollar overall struggled for sustained support with a mixed performance. Lower US and European yields supported the yen during the day. USD/JPY dipped to near 128.00 before a recovery and traded just above 128.50.

The Swiss franc regained ground as global yields declined. EUR/CHF retreated to below 0.9950 before stabilising with net USD/CHF gains to 0.9140.

Sterling dipped sharply after the BoE policy decision with expectations that peak rates were very close. Long-term GDP forecasts also fuelled longer-term underlying negative sentiment. GBP/USD dipped to lows close to 1.2200.

Commodity currencies overall were unable to make headway. The Australian dollar was subjected to a sharp correction with AUD/USD below 0.7100 on Thursday. AUD/USD was held around 0.7070 on Friday despite improved Chinese PMI data. USD/CAD settled around 1.3325 amid choppy trading in oil prices.

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