Market Report : 02.02.22

Published: 02/02/2023 By ECAP

Sterling approaches today’s interest rate hike by the Bank of England beset by expectations for a dovish forward guidance. Moreover, broader investor negativity related to the UK’s economic underperformance when compared to its global peers further dents any potential upside movement. The Bank is expected to raise interest rates by 50-basis points, but expectations for a 25-basis point hike have risen amidst fresh signs the UK economy is slowing under the weight of previous rate hikes. Furthermore, bank officials, including Governor Bailey, have recently welcomed evidence showing inflation is turning a corner and natural gas prices have continued to fall sharply; thus, easing inflation and growth concerns if sustained. Market participants will be closely watching Andrew Bailey’s press conference, many analysts expect the accompanying guidance to be more dovish by providing a stronger signal that the pace of hikes will be stepped down. The peak rate is now priced at around 4.37% as investors lower expectations; a development that has been tracked by a softer pound.

The Euro found some support yesterday as inflation in the eurozone dropped for a third consecutive month in January on the back of a significant fall in energy costs. Headline inflation in the eurozone came in at 8.5% in January, well below the 9.2% seen in December. The 20-member region has gone through substantial price increases in 2022 after Russia’s invasion of Ukraine pushed up energy and food costs across the bloc. However, the latest data provides further evidence that inflation has started to ease. Looking forward, the ECB is expected to hike rates by 50 basis points today. However, many analysts expect the catalyst to come from Christine Lagarde’s press conference. Ultimately, any forward guidance and insight on how much further the central bank plans to increase interest rates will affect the bloc’s single currency.

The dollar pared losses against major peers yesterday after the Federal Reserve raised interest rates by 0.25%. The Fed signalled a need to push monetary policy further into restrictive territory as the central bank looks to make up further ground in its battle against inflation. The quarter-basis point hike marked the second downshift from the Federal Reserve following a slowdown to 50-basis points at the December meeting after four-consecutive 75-basis-point hikes. Nevertheless, with monetary policy now at sufficiently restrictive levels and data continuing to show slowing inflation as well as weaker economic growth, many on Wall Street doubt whether there is a need for the Fed to go much further after this latest hike. However, the labour market remains red-hot and that threatens to boost inflation. Jerome Powell’s press conference evidenced that the Fed is still hesitant to hoist the white flag on rate hikes.