EM market report digital figures graph

Markets increase UK rate hike forecasts

Thanim Islam
Thanim Islam 17 June 2022

GBP: Sterling bounces back

EUR: Anti-fragmentation tool news emerges

USD: Dollar continues to weaken post-Fed meeting

Sterling

Sterling climbed following the Bank of England meeting. The Bank raised rates by 0.25% with six members voting for a 0.25% rate hike and the other three members electing for a 0.50% rate hike, which was in line with consensus. But what caused sterling to climb higher was the change in guidance with the Bank of England opening the door for 0.50% rate hikes in forthcoming meetings by stating “The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

Money markets are now pricing in a 0.50% hike in August and September, with a year end interest rate of 3%.

Whilst the Bank of England are perhaps not as hawkish as other central banks, the change in guidance suggests the Bank are turning more hawkish and that for now should support sterling.

BoE members Pill and Tenreyro will be speaking today.

Euro

News emerged yesterday of the tool the ECB want to use to combat fragmentation. Should the spread between sovereign bond yields widen beyond certain thresholds or should market moves exceed certain speeds then the new tool is set to trigger to keep stability. The ECB will be keen to get a plan in place before the next ECB meeting in July.

Support for the euro picked up as a result limiting the gains for the pound.

Today's sees the release of May's inflation figures.

USD

Dollar weakness continued over European trading hours as markets repositioned themselves following yesterday's Swiss national Bank and Bank of England meetings. At its weakest point we saw the US dollar sell off by 2% from the highs on Wednesday.

Coming into this morning however, we are seeing the dollar regain the lost ground after the Bank of Japan disappointed the market by not following what the SNB and BoE did yesterday. The BoJ were dovish by keeping all monetary policy settings the same.

Going into the long weekend, markets look to hedge their bets in a volatile FX market by buying back into the US dollar. As mentioned yesterday, the Fed still remain one of the most hawkish central banks so over the medium term should remain relatively supported, especially when volatility increases.

Market rates

Today's Interbank Rates at 09:26am against sterling movement vs yesterday.

Euro

€1.169 ↑

US dollar

$1.229 ↑

Australian dollar

$1.759 ↓

South African rand

R19.57 ↑

Japanese yen

¥165.1

Have a great day.