As many were expecting, a hawkish Bank of England delivered its second interest rate increase in as many months, doubling the base rate to 0.5%. More surprisingly, however, is that 4 members of the committee voted for a bigger 0.5% rise. Governor Andrew Bailey expects further increases to be necessary, but he tried to temper expectations of rapidly rising rates. Sterling initially moved higher, but drop back shortly after the announcement.
This week the key data is the GDP update for December which is expected to show a fall in activity. This is mainly due to the impact of Omicron with a decline in consumer facing services. December retail sales fell by 3.7% and pubs, restaurants and other leisure facilities are likely to see similar falls. Markets expect an overall monthly fall in GDP by around 0.5%. These impacts are likely to roll over into the start of 2022.
The ongoing “partygate” saga continues. Despite seeing Sue Gray’s report, nothing has been settled and prime minister’s prospect of remaining in office remains unclear. Concerns continue to rise around standards of living and consequent spending, with more than 50% increases in the energy cap price and further tax rises due to come in this year.
GBPEUR – 1.1831
GBPUSD – 1.3525
The European Central Bank was confidently expected to keep its key benchmark unchanged at 0%, as it has for almost 6 years. Whilst there was no policy change, the ECB did save a few surprises for the press conference. In the wake of a higher than expected January Eurozone inflation number, ECB President Lagarde seemed to hint that policy may be more hawkish direction at the next meeting in March.
With very little data this week, the central bank speakers further narrative will be closely watched. ECB President Lagarde speaks today and ECB member Villeroy tomorrow. Any comments around inflation and hints around the potential next steps and timing of action from the ECB will be of key interest. Inflation data last week showed CPI inflation rising to a new record high of 5.1% in January.
EURUSD – 1.1431
EURGBP – 0.8452
Given the ongoing increases in inflation, this weeks US CPI report will be watched closely. It is almost certain that annual inflation will move up again and could hit a new 40-year high of 7.5%. There is a general agreement that inflation is set to rise further in coming months with the potential to reach 8%.Core inflation is also expected to have gone up again, to 6% from 5.5%, which would be a near 40-year high.
Unless energy prices continue to climb, US inflation is likely to peak this quarter and to fall in the second half. However, the extent to which ‘core’ inflation will ease is more uncertain given ongoing concerns about wage pressures from a tight labour market. That is likely to be the key focus for the Fed this year and the number one determinant of the extent to which US interest rates will rise. Employment rose by a higher than expected 467,000 in January, with earnings accelerating to 5.7%.
GBPUSD – 1.3525
EURUSD – 1.1431
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*Interbank rates correct at 7 am on the date of publishing.