Sterling was unable to hold initial highs as growth concerns increased with GBP/EUR reversing strongly from 2-year highs.
The ECB made no changes to interest rates but indicated a recalibration in March due to inflation concerns.
Rhetoric from ECB President Lagarde was more hawkish as she did not rule out an interest rate increase in 2022. German bond yields moved sharply higher on the comments. US bond yields also moved higher amid expectations of tighter global monetary policies. Wall Street equities dipped sharply but futures recovered on Friday.
The dollar was resilient away from the Euro with strong ISM non-manufacturing data underpinned support. The Euro advanced strongly against the dollar with EUR/USD at 2-week highs around 1.1450.
The Bank of England increased interest rates by 0.25% with a 5-4 vote as dissenters called for a 0.5% hike. Sterling was unable to hold initial highs as growth concerns increased with GBP/EUR reversing strongly from 2-year highs. Commodity currencies secured only a small net advance against the US dollar.
The Euro-zone PMI services-sector index was revised marginally to 51.1 from the flash reading of 51.2 with both the Italian and services sectors dipping into contraction. The ECB held interest rates at 0.0% following the latest policy meeting, in line with consensus forecasts and the Euro edged lower in an immediate response.
Bank President Lagarde stated that inflation surprises caused unanimous concern within the council and that the Euro area is no longer in a low inflation environment. She added that the March and, especially the June meeting, will be essential in evaluating guidance. Inevitably, Lagarde was pressed on whether a rate increase was still very unlikely in 2022. Lagarde did not repeat the comment with markets drawing their own conclusion from the more hawkish commentary.
Subsequently, sources indicated that it was sensible not to rule out a rate hike and that there was likely to be a policy change in March if inflation did not decline. There was a sharp shift in yield expectations with markets expecting benchmark rates to be 0.50% at the end of 2022 from 0.10% previously.
The Euro jumped higher on the rhetoric and shift in money-market yields with EUR/USD breaking above the 1.1400 level for the first time in over two weeks. The Euro maintained a firm tone after the European close with a further shift in underlying market sentiment surrounding monetary policy.
The latest US employment report will be released on Friday with expectations of a weak increase in payrolls, although wider data including wages will also be important.
The dollar remained on the defensive on Friday with the more hawkish ECB tone continuing to boost the Euro as EUR/USD traded at fresh 2-week highs above 1.1450.
Initial US jobless claims declined to 238,000 in the latest week from a revised 261,000 the previous week and below consensus forecasts of 245,000 while continuing claims declined to 1.63mn from 1.67mn. The ISM non-manufacturing index declined to 59.9 for January from 62.3 the previous month, although this was slightly above consensus forecasts. There was a slight slowdown in new orders growth with a steeper slowdown in business activity. There was a slower rate of employment growth for the month while prices continued to increase at a rapid rate with the fourth successive reading above 80.0.
US yields moved higher after the New York open with a wider increase in global yields. With expectations that the Bank of Japan would maintain a very loose policy, there was notable yen selling on yield spreads with USD/JPY strengthening to around 114.90 and EUR/JPY posting strong gains.
Equities held firm in Asia on Friday while Chinese markets remained closed with USD/JPY holding just below 115.00 while EUR/JPY strengthened to 3-month highs near 131.90.
Sterling held a firm tone into the Bank of England policy decision. The UK PMI services index was revised higher to 54.1 from the flash reading of 53.3 which suggested Omicron fears had eased further late in January. Chancellor Sunak announced measures to offset the impact of a surge in energy prices.
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 market expectations, but there was a big surprise with the 5-4 vote split as four members of the committee voted for a more aggressive interest rate hike to 0.75%. The MPC stated that evidence of domestic inflation pressures and a tight labour market indicated that a rate increase was needed. The bank upgraded its peak inflation forecast to 7.25% for the second quarter while growth forecasts were downgraded with the 2022 GDP increase now seen at 3.75% from 5.0% previously.
Sterling spiked after the decision with a GBP/USD peak near 1.3630 while GBP/EUR rallied to test 24-month highs above 1.2065. Governor Bailey stated that further modest rate increases were likely over the coming months, but also warned on a severe squeeze in consumer spending.
GBP/USD consolidated around 1.3600, but GBP/EUR reversed strongly to below 1.1900 amid wider Euro strength following the ECB meeting. The UK currency was unable to make headway in early Europe on Friday as growth concerns sapped support and GBP/USD traded just below 1.3600.
|07:00||German Factory Orders (M/M)(DEC, 2021)||0.50%||3.60%|
|07:45||Non-Farm Payrolls QQ||0.40%|
|09:30||GBP PMI Construction(JAN)||54||54.3|
|10:00||Euro - Zone Retail Sales (M/M)(JAN)||1.00%|
|10:00||Euro - Zone Retail Sales (Y/Y)(JAN)||1.00%|
|13:30||USD Average Hourly Earnings (M/M)(JAN)||0.50%||0.60%|
|13:30||USD Average Hourly Earnings (Y/Y)(JAN)||5.10%||4.70%|
|13:30||United States Unemployment Rate(M/M)(JAN)||3.90%||3.90%|
|13:30||USD Private Nonfarm Payrolls (JAN)||233K||211K|
|13:30||USD Non-farm Payrolls(M/M)(JAN)||238K||199K|
|13:30||CAD Employment Change (M/M)(JAN)||54.7K|
|13:30||CAD Full Employment Change(JAN)||122.5K|
|13:30||CAD Unemployment Rate (M/M)(JAN)||5.90%|
|15:00||CAD Ivey PMI(M/M)(JAN)||51.1|
|15:00||USD Michigan Consumer Sentiment(FEB 01)||67.6||67.2|