Fed disappoint, all eyes on the Bank of England

GBP: Rate rise of 0.25% expected by the Bank of England

EUR: EC set to sanction Russian oil

USD: Dovish rate hike by Fed

Sterling 

Sterling finished lower against most of the majors yesterday ahead of the Bank of England meeting today.

It is widely anticipated that we will see a 0.25% rate rise by the Bank today, the fourth consecutive hike, pushing rates to their highest since 2009. The minutes are expected to show an 8-1 vote in favour of a hike as well with BoE member Cunliffe likely to be the only dissenter. The key in the Bank of England meeting will be the outlook for the economy and thus their assessment on future rate hikes. We could well also see an announcement by the Bank to start considering the active selling of gilts from their balance sheet as well.

It seems likely that the Bank will revise growth forecasts lower for this year but will argue that the UK will avoid recession. As a result, the Bank will be cautious about signalling timing for further hikes and most likely adopt a wait and see approach over the coming months. It seems we will see a dovish hike and as a result could see sterling weaken.

Before the meeting we have Services PMIs at 9.30am expecting to growth in the sector remain the same as March at 58.3.

Euro 

Eurozone figures had very little impact on the euro yesterday. Services came in as expected at 57.7 but retail sales only rose by 0.8% failing to meet the expected rise to 1.4% with rising inflation and falling consumer confidence putting pressure on household spending.

The European Commission put forward proposals for new sanctions on Russian oil yesterday which could hit growth prospects over the longer term.

However, as we will come onto shortly, the euro had a strong evening following the Fed decision causing the euro to be at its strongest level versus both the dollar and the pound since 27th April.

USD 

So, the Fed stuck to their script and rose interest rates by 0.5% as well as giving the green light on subsequent 0.5% rate hikes over the next few meetings and formally announcing the start of its quantitative tightening programme set to begin in June. Initial moves on the dollar were muted as the announcements were widely anticipated. However, in the accompanying rate statement the key message from the Fed was that they were not actively considering a 0.75% rate hike. As a result, we saw a sell off on the US dollar with markets seemingly disappointed in the message. We saw both GBPUSD and EURUSD rates climb to the highest since 27th April.

The Fed also said they will actively keep an eye on inflation and thus job tightening and wage growth in the US will also be very important over the coming months – so Friday job print will be in focus.

The usual precursor of the ADP job print disappointed showing only 247,000 jobs were added in April, shy of the 395,000 expected.

We have seen a recovery on the US dollar in the early hours of the morning, almost reversing most of the sell off from last night.

Market rates 

Today's Interbank Rates at 09:00am against sterling movement vs yesterday.

Have a great day.