Published: 23/06/2023 By ECAPThe Bank of England hiked interest rates by 50-basis points to 5% yesterday, while analysts were anticipating an increase of 25-basis points. Sterling initially jumped on the larger than expected rate hike only to fall back again - before resuming its course this morning - presumably on views that the BoE is ready to engineer a harder slow-down to get inflation under control. Ultimately, economists could argue that as a growth-sensitive currency, this is all bad news for the pound: while higher interest rates are typically supportive of currencies, the risk that they will result in a recession in the UK has hit the pound and pushed some investors to seek safe-haven assets like the US Dollar.
The Euro lost further ground this morning ahead of the release of the region’s purchasing managers' index surveys. In fact, a softening in activity is largely expected, but solid numbers may also hit the euro as they would suggest higher rates ahead in a region which fell into recession in the first quarter of the year. On that note, ECB policy makers seem worried about the persistence of core inflation. Adding to that, headline inflation is thrice the required rate of 2%, which is keeping chances of more rate hikes in July alive. However, uncertainty is stemming from the September meeting. ECB policymaker Peter Kazimir said on Wednesday that he was not certain whether the central bank will continue its rate hike cycle in September.
The US Dollar gained in early European trade this morning, as more aggressive monetary tightening by a series of central banks, including the Bank of England, prompted a bout of risk aversion. The Dollar Index traded 0.3% higher at 102.28, just above its recent one-month low. Looking forward, market participants will await the release of flash US PMI prints for June, due during the early North American session. Apart from this, speeches by influential FOMC members will be looked upon for more cues on monetary policy, which, along with the broader risk sentiment, will drive USD demand.