18/03 – Bank of England meeting at noon

GBP: Who does the BOE most sound like?

EUR: Vaccine blockade not helping 

USD: Powell takes the dollar out at the knees

Sterling

Sterling rallied yesterday as traders started to price in more hawkish notes from the Bank of England at its meeting this afternoon. It is the Bank of England’s opportunity to stick or twist today; either following the Federal Reserve in marking higher yields as gesture of optimism in the recovery or follow the ECB and see them as a threat to the recovery and something to be contained.

We think the Bank will look more to the Fed than the ECB with market assumptions of when and where interest rates will eventually rise. Current pricing sees an initial move in the base rate higher by 0.75% towards the end of 2024 with the hikes stopping at 1.25%.

Given the issues that the UK economy either has yet to deal with or has brought upon itself – recovery from the pandemic, recalibration of the economy following Brexit, the impact of the most recent Government plans to raise taxes, and the level of public sensitivity of public finances to increasing interest rates – it’s difficult to see traders having a stomach for further increases in these expectations.

That should quell sterling gains in the longer term but any optimism today is likely to see pound rise across the board.

The BOE announcement is at noon.

Euro

With further threats from the EU around vaccine procurement, the euro was always going to have a tough session, only losing ground against the USD courtesy of a hyper dovish Federal Reserve meeting.

We will have to see vaccine headlines turning more positive for the EU to see the single currency rise dramatically.

US dollar

The Chairman of Federal Reserve doesn’t care how many times he has to say it, he’s going to be clear; the central bank is not thinking about raising interest rates at the current time and will need to see inflation remain well over target before even thinking of raising borrowing costs.

This is a central bank that does not think its stimulus measures need to draw to a close anytime soon and the markets took this as a sign that the wider USD should really weaken, and it did through the US evening session.

Bond yields initially rose in the US before falling, with equities coming lower as well into the US close. This is not an easy market to trade around at the moment and therefore it remains crucial for anyone needing to operate in these conditions to have a strong idea of what prices is a goal and which can be used as a fallback position.

It’ll be interesting to see how the dollar trades with wider improvements in the economic data that’s coming out of the US; strong data may no longer be a reason to buy the dollar at the moment.

Elsewhere

Nine out of ten times a weaker USD is going to help the AUD and it did overnight with the Australian currency running to a two-week high. Strong local employment numbers also helped the picture as well although the unemployment rate remains well above the level that the RBA believes will begin to boost inflation locally.

Market rates

Today’s interbank rates at 08:27 against sterling. Movement vs yesterday.

Euro€1.168 ↑
US dollar$1.396 ↑
Australian dollar$1.786 ↓
South African randR20.48 ↓
Japanese yen¥152.4 ↑

Have a great day everyone.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.