EM Market Report

Bank of England hikes rates and warns of recession risk

Mudassar Malik 06 May 2022

GBP: BoE hikes interest rates by 0.25%

EUR: German economic data weighs on the euro

USD: Non-farm payrolls and unemployment rate in focus today

Sterling 

The day started off positively with the pound benefiting from some default gains, this followed the disappointment of the Fed not considering a 0.75% rate hike. In addition, PMI services data surprised to the upside with a decent reading of 58.9 against a forecast of 58.3. However, the Bank of England ensured this uptick in the pound didn’t last. The central bank raised its benchmark rate by 0.25% as widely anticipated, though three members of the MPC dissented the majority and sided with a bigger 0.5% move. The Bank officials went on to warn of soaring inflation which is expected to hit around 10% by October and warned over economic growth, which is expected to tumble by almost 1% by Q4 this year. The stark warning of a slowing growth sparked a sell off in the pound, which saw its biggest plunge since March 2020, with rates falling to 22-month lows against the dollar and 5-month lows against the euro.

Today we will see the markets continuing to digest the news from the central bank yesterday. Construction PMI data will be due this morning though unlikely to have any significant impact.

Euro 

Concerns about the economic outlook for the eurozone resurfaced yesterday as German data showed factory orders tumble and construction PMI fall into contraction territory. The single currency remains pressured as a result and the sharp slowdown of the region's biggest GDP raises further concerns of how the ECB will be able to withdraw stimulus without risking recession. Furthermore, the recent rate hikes from the Fed and BOE has further highlighted the monetary policy divergence between the ECB and its two closest peers, this along with the ongoing impact of the Ukrainian war will likely continue to see the euro pressured.

This morning German industrial production figures added to the recent string of bad news from the eurozone powerhouse, with output falling 3.9%. With Germany clearly suffering from supply chain disruptions on the back of the Ukraine war and lockdowns in China.

USD 

With a thin data calendar from the US today, markets seemed unconvinced that the Fed can contain the soaring inflation pressures without more aggressive measures. This saw broad based USD strength as the dollar benefitted from risk-off sentiment flow. US stocks plummeted with the S&P 500, Dow Jones and Nasdaq all registering heavy losses.

This afternoon, the focus will be on the jobs market in the US, with the all-important non-farm payrolls expected to post a decent figure, though off the pace for last month. The unemployment rate is expected to have contracted 0.1% to 3.5% last month, which will continue to support the strong labour market in the US and the Fed’s aggressive rate hiking plan.

We have two Fed speeches today – Fed John Williams and Fed Chris Waller, with markets be keen to hear of any forward expectations on rate hikes.

Market rates 

Today's Interbank Rates at 09:15am against sterling movement vs yesterday.

Euro

€1.169 ↓

US dollar

$1.232 ↓

Australian dollar 

$1.741 ↑

South African rand 

R19.82 ↑

Japanese yen 

¥160.8 ↓

Have a great day.