Sterling continued to drift lower during Wednesday with an underlying lack of confidence in the UK fundamentals. There were also expectations that the Bank of England would adopt dovish guidance at Thursday’s policy meeting. Sterling was unable to move higher against the dollar and drifted back lower after the Wall Street open. Sterling posted gains after the Federal Reserve press conference as risk appetite also tended to strengthen. The Bank of England will announce the policy decision on Thursday with consensus forecasts for a further 50 basis-point hike to 4.00%. Guidance and revised forecasts will be very important for Sterling.
Key Data
12.00 Bank of England Interest Rate Decision Exp. 4% Prev. 3.5%
12.00 Bank of England Minutes
12.00 Monetary Policy Summary
12.30 Andrew Bailey Speech
The headline Euro-Zone CPI inflation rate declined to 8.5% for January from 9.2% and below consensus forecasts of 9.0%. The underlying rate, however, was unchanged at 5.2% and slightly above expectations of 5.1%. The core data maintained expectations that the ECB would maintain a hawkish policy stance. Consensus forecasts are for the ECB to increase interest rates by a further 50 basis points to 3.00% with guidance crucial.
Key Data
13.15 European Central Bank Interest Rate Decision Exp. 2.5% Prev. 2%
13.15 European Central Bank Rate on Main Refinancing Operations Exp. 3% Prev. 2.5%
13.15 European Central Bank Monetary Policy Decision Statement
13.45 European Central Bank Press Conference
The Federal Reserve increased interest rates by 0.25% at the latest policy meeting which was in line with consensus forecasts and the vote was unanimous. According to the statement, inflation has eased somewhat, but remains elevated. The committee also anticipates that further increases will be appropriate, although it will take into account the cumulative tightening and policy lags. The dollar posted gains in immediate reaction to the statement, but failed to hold the gains when Chair Powell stated that the Fed had come a long way, but there was more work to do on inflation. In this context, it would be very premature to declare victory. Powell stated that the disinflationary process has started, but this is only in around 25% of the core PCE. He does expect disinflation pressures will expand, but it’s not being seen yet. Powell suggested that two more rate hikes are potentially needed with a better balance needed in the labour market. He reiterated the high degree of uncertainty and that the Fed is data dependent. If the economy performs as expected there will not be scope for rate cuts this year as he again warned that it would be a major mistake to ease policy too quickly, but the situation could change if inflation declines faster than expected.
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