Bank of England hikes rate to 1.00%.

The Bank of England increased interest rates by a further 25 basis points to 1.00% which was in line with consensus forecasts. There was, however, a 6-3 split for the decision with Haskel, Saunders and Mann voting for a larger 50 basis-point increase.

The monetary policy report stated that inflation was expected to peak just above 10% late this year. The revised growth forecasts were a key element with the bank forecasting that GDP would dip sharply in the fourth quarter of 2022 and contract slightly in 2023 with only marginal growth in 2024.

The consensus was that further rate increases would be needed over the next few months, but some members disagreed with this analysis and suggested that rates should not increase further given the economic risks. The very downbeat stance on the economy triggered a downward revision to medium-term interest rate expectations.

Although the actual rate decision was slightly more hawkish than expected, growing divisions within the committee and the notably downbeat stance from the bank undermined confidence.

Forecasts of GDP contraction in 2023 and an inevitable surge in recession talk were crucial factors in undermining Sterling confidence.

The slide in global risk appetite was also a key element in undermining the currency with the sharpest one-day decline for over two years.

After a limited decline following Chair Powell’s comments on Wednesday, US yields moved sharply higher on Thursday.

The 10-year yield increased to highs at 3.10% and the highest level since early December 2018 amid fears over increased inflation pressures.

US equites came under sustained pressure as the quick reverse from Wednesday’s strong gains triggered a sharp reversal and heavy selling.

Markets were also unsettled by the increase in yields and fears over a tightening of financial conditions in the US and global economy.

The Nasdaq index posted a sharp 5.0% decline on the day with a test of 17-month lows.

The surge in US yields helped boost the dollar and markets continued to see little attraction in alternative currencies. The slide in risk appetite also provided an element of support for the dollar, especially with fears over further pressure on the Chinese economy. The dollar index surged to a fresh 20-year high.

The Norwegian central bank held interest rates at 0.75% following the latest policy meeting and continued to signal that rates would be increased again at the June meeting.

Confidence in the Euro remained fragile, although there was an element of protection as ECB officials talked up the potential for an interest rate increase in July. Dollar strength dominated currency markets as US yields moved sharply higher. A covering of carry trades funded through the Euro provided some protection. EUR/USD steadily lost ground and dipped to test the 1.0500 level before a slight recovery to 1.0530 on Friday.

The yen gained an element of protection from the slide in equities. USD/JPY still posted net gains to just above 130.50 on Thursday.

The Swiss franc declined sharply despite the global mood of risk aversion. USD/CHF posted fresh 26-month high just below 0.9900. EUR/CHF posted net gains to 1.0380.

Sterling remained under heavy pressure with the sharpest 1-day decline for over two years. GBP/USD dived to 22-month lows below 1.2350 before a marginal recovery. GBP/EUR also dipped to 2022 lows near 1.1700 before a correction to 1.1750.

Commodity currencies were subjected to heavy selling amid the slide on Wall Street and strong dollar advance. AUD/USD slumped to below 0.7100 before trading just above this level on Friday. USD/CAD surged to above 1.2850 before a slight correction.

Economic Calendar

07:00German Industrial Production (M/M)(MAR)0.20%
07:45France - Non-Farm Payrolls QQ0.40%
09:30GBP PMI Construction(APR)59.1
13:30USD Average Hourly Earnings (M/M)(APR)0.40%0.40%
13:30USD Average Hourly Earnings (Y/Y)(APR)5.50%5.60%
13:30USD Non-farm Payrolls(M/M)(APR)431K
13:30USD Labor Force Participation Rate(APR)62.40%
13:30USD Private Nonfarm Payrolls (APR)400K426K
13:30United States Unemployment Rate(M/M)(APR)3.60%3.60%
13:30CAD Employment Change (M/M)(APR)72.5K
13:30CAD Unemployment Rate (M/M)(APR)5.30%5.30%
15:00CAD Ivey PMI(M/M)(APR)6074.2

*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.