BoE hikes rates by 50 basis points.

The Bank of England raised interest rates by 50 basis points to 1.75% which was in line with consensus forecasts and took rates to the highest level since late 2008. There was an 8-1 vote for the decision with Tenreyro voting for a smaller increase to 1.50%.

The bank raised its inflation forecast with a peak now seen above 13% late this year under the impact of a fresh surge in retail energy prices. The bank also downgraded its forecasts for the economy with GDP seen as contracting in 2023 and 2024 with five quarters of negative growth as real disposable incomes were set to decline by the largest amount since records began 1964.

The bank noted that uncertainty was exceptionally high and moved away from predictive forward guidance while reiterating that it would take forceful action if needed.  The bank forecast that, based on market rates, inflation would be well below target on a 3-year horizon which implied that it considers market expectations are too high.

The UK PMI construction index declined to 48.9 for July from 52.6 the previous month which was below consensus forecasts of 52.0 and the weakest reading since May 2020. New orders did remain in expansion territory, but business confidence remained subdued while cost pressures were the weakest since March 2021.

Sterling dipped sharply after the BoE rate decision amid increased recession fears but did recover from intra-day lows with a steady global risk tone providing an element of support.

Oil prices came under further pressure with fears over underlying demand conditions offsetting still very tight supplies. WTI dipped to 6-month lows with Brent at 5-month lows.

The latest employment report will be released on Friday with expectations of an increase in non-farm payrolls of around 250,000 with the unemployment rate holding steady at 3.6%.The overall data, including average earnings, will be important for evidence surrounding underlying growth and inflation trends in the economy.

Markets remained uneasy over the Taiwan situation with expectations that there will be long-term economic pressure from China which will have a negative impact on the Asian economy.

Euro-Zone developments remained limited during Thursday with markets still fretting over the impact of very high gas prices. The dollar retreated from intra-day highs as yields failed to make headway. EUR/USD found support above 1.0150 and rallied to 1.0230 with little net change on Friday.

The yen recovered strongly despite solid risk conditions. USD/JPY slipped sharply to lows near 132.50 before a recovery to 133.30.

The Swiss franc was mixed as global moves dominated. EUR/CHF edged higher to 0.9780 while USD/CHF retreated to lows below 0.9550.

Sterling dipped sharply on increased recession fears after the BoE statement. GBP/USD slumped to lows just below 1.2070 before a rebound to near 1.2150 as the dollar retreated.

Commodity currencies rallied as the dollar retreated, although uncertainty prevailed. AUD/USD recovered to near 0.7000 before slipping and settling around 0.6965. The Canadian dollar was unable to make headway as lower oil prices dampened sentiment with USD/CAD at 1.2870.

Economic Calendar

07:00GBP Halifax HPI (M/M)(JUL)1.80%
07:00German Industrial Production (M/M)(JUN)0.40%0.20%
07:45France - Industrial Output MM(JUN)-0.10%
07:45France - Trade Balance(JUN)-12.8B-13.0B
09:00Italy - Industrial Output MM SA(JUN)-1.10%-1.10%
13:30USD Average Hourly Earnings (M/M)(JUL)0.30%
13:30USD Average Hourly Earnings (Y/Y)(JUL)5.10%
13:30USD Non-farm Payrolls(M/M)(JUL)5.10%372K
13:30USD Labor Force Participation Rate(JUL)62.20
13:30USD Private Nonfarm Payrolls (JUL)381K
13:30USD Private Nonfarm Payrolls (JUL)3.60%
13:30CAD Employment Change (M/M)(JUL)-43.2K
13:30CAD Full Employment Change(JUL)-4.0K
13:30CAD Full Employment Change(JUL)4.90%
15:00CAD Ivey PMI(M/M)(JUL)62.2
20:00USD Consumer Credit(JUN)22.35B

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.