Market Report 17-06-2022

Published: 17/06/2022 By ECAP

Attention on yesterday turned to the Bank of England that, as was largely expected, hiked interest rates by another 25 basis points. Sterling initially sold-off sharply against the US dollar, down almost around one percent at one stage, as some investors were hoping for a 50bp move or, at the very least, saw an extra dissenter in favour of a larger hike. All nine members of the committee were in support of an immediate hike, although only three policymakers voted in favour of a larger, 50 basis point move (Jonathan Haskel, Catherine Mann and Michael Saunders). Financial markets were actually pricing in a decent chance of a bumper 50 basis point rate hike, particularly following the hawkish turns mentioned above, so no surprises to see the knee-jerk move lower in the pound.

Within an hour of the press release sterling had, however, recovered all of its losses and ended London trading yesterday fairly sharply higher, GBPUSD soared through the 1.23 level setting the week trading highs. After the initial disappointment, focus turned to the remarks within the bank’s statement, which markets viewed as hawkish. In the statement, the MPC removed its previous forward guidance that ‘some degree of further tightening in monetary policy may still be appropriate in the coming months’ - a line that we criticised last month for being unnecessarily ambiguous. Instead, the MPC said that it was ready to act ‘forcefully’ in order to tackle the persistent inflation overshoot.

This has very much opened the door to 50 basis point moves at upcoming meetings - indeed, markets are now currently pricing in 100 basis points of hikes through the next two meetings in August and September. This provided strong support for sterling, which ended yesterday as one of the better performing currencies globally, behind only the Japanese yen and Swiss franc in the G10.

Euro Area inflation data (this morning), and another speech from Fed chair Powell (this afternoon) will round off what has been a very hectic week in financial markets.