Published: 14/03/2023 By ECAPSterling edged higher this morning following the release of UK labour market data showing a bigger than expected increase in employment. Furthermore, growth in pay in Britain, which the Bank of England is watching closely as it weighs up whether to pause its run of interest rate hikes next week, lost pace in the three months to January, therefore, reducing inflationary pressures. For now, the BoE is expected to raise borrowing costs on March 23 by a quarter of a percentage point to 4.25% although investors have cut their bets on such a move sharply after the collapse of US lender Silicon Valley Bank. Interest rate futures showed investors were putting the chance of the BoE pausing its rate hikes next week at about 40% whilst a quarter of a percentage point increase in borrowing costs was seen as a 60% possibility.
The Euro fell in European trade this morning off a four-week high against dollar and on track for the first loss in four days following active profit-taking by investors and traders. Investors now await data on the European Central Bank's meeting to gather clues on the future path of policies. ECB President Christine Lagarde vowed to do all that's required to bring prices back to stability. It's expected the ECB will take a bullish tone this week after strong euro zone consumer prices data, with Lagarde siding with hawks pushing for further 50-basis point steps later in the year. However, this now seems less likely because the recent events in the banking system will cause financial conditions to tighten both in the US and the Eurozone.
The dollar stabilized in early trading European trade this morning as the shock from the collapse of three US banks in a week began to recede. The signs of stress in the US financial system have caused a sharp reappraisal of the outlook for interest rates across the US and Europe since Thursday, with two-year yields in the US falling by the most in any three days since the 1987 market crash. Whereas there was a broad consensus for a 25 basis point rate hike from the Federal Reserve next week, with 50 basis points seen as the next most likely outcome, most of the market now expects no change. Looking forward, the US consumer inflation report for February is due later in the session and is expected to show only a relatively modest drop to 6% from 6.4% in January.