BoE increases rates to 3.00%.
The Bank of England increased interest rates by 75 basis points to 3.00% at the latest policy meeting which was in line with expectations. To members voted against the decision with Dhingra voting for a 50 basis-point hike while Tenreyro wanted a 25 basis-point hike.
The two dissenters were concerned that the economy was already weakening and were concerned over the risk of tightening too aggressively given the lags associated with monetary policy.
The bank warned that the economy was likely to be in recession for two years, although the more pessimistic forecasts were based on market rate pricing and these expectations have already declined since the report was prepared.
The bank again pushed back against market expectations with comments that it did expect rates to increase further, but not too levels implied by markets. Bank Governor Bailey stated that he would make no forecasts but hinted that rate increases were likely to be capped around 4.0%.
Sterling dipped sharply after the Bank of England decision and press conference with dovish guidance from Governor Bailey undermining the currency, especially with fragile risk conditions also contributing to selling pressure.
The ISM non-manufacturing index declined to 54.4 for October from 56.7 previously and below expectations of 55.5. There was a significant slowdown in business activity and new orders growth for the month with a small increase in order backlogs. There was a sharp decline in exports orders into contraction territory.
The employment index dipped into contraction territory for the month while there was a small acceleration in inflation pressures for the month.
The dollar posted further strong gains on Thursday as the hawkish Fed policy continued to boost demand for the US currency with the currency index at 2-week highs.
A recovery in Asian equities helped trigger a tentative dollar retreat on Friday.
The latest US employment will be released on Friday with consensus forecasts for an increase in non-farm payrolls of around 200,000 with the unemployment rate edging higher to 3.6%.
Average earnings are forecast to increase 0.3% on the month. The data will need to be very weak to trigger a shift in Fed expectations.
Swiss consumer prices increased 0.1% for October, slightly below expectations of 0.2% with the year-on-year rate retreating to 3.0% from 3.3% and below market expectations of 3.3%. The lower-than-expected inflation rate triggered some speculation that the National Bank would be able to avoid further monetary tightening and the franc lost ground.
The Norges Bank increased interest rates by 25 basis points to 2.50% at the latest policy meeting. Investment banks were evenly split between the potential for a 25-50 basis-point rate hike. Rates are expected to be increased again in December.
ECB council members indicated that there would be a December rate increase of 50 or 75 basis points in December. Bank President Lagarde stated that there was a way to go on rate increases.
The Euro remained under pressure during Thursday after Powell’s hawkish Fed rhetoric. Higher yields and an upward revision to Fed expectations boosted the dollar. EUR/USD dipped further to lows at 0.9730. EUR/USD recovered to 0.9775 on Friday amid a dollar retreat.
The yen was also undermined by higher US yields. USD/JPY posted higher near 148.50 before a retreat to near 148.00 on Friday.
The lower-than-expected inflation data undermined the Swiss franc and EUR/CHF advanced to 0.9880. USD/CHF posted strong gains to near 1.0150 before a retreat to just below 1.0100 on Friday.
The dovish Bank of England rhetoric triggered further Sterling selling, especially with weaker global equities. GBP/USD posted sharp losses to lows around 1.1150.
Commodity currencies remained under pressure amid weaker equities and dollar strength but did rally from intra-day lows. There were significant gains on Friday as risk appetite attempted to recover.
AUD/USD recovered from 0.6270 lows with a recovery to near 0.6350. USD/CAD posted strong gains to highs just above 1.3800 before a sharp reversal to 1.3670.
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