Sterling held a firm tone into the Bank of England policy decision. The UK PMI services index was revised higher to 54.1 from the flash reading of 53.3 which suggested Omicron fears had eased further late in January. Chancellor Sunak announced measures to offset the impact of a surge in energy prices. The Monetary Policy Committee (MPC) increased interest rates to 0.50% from 0.25% and the first back-to-back increase since 2004. The rate decision was in line with market expectations, but there was a big surprise with the 5-4 vote split as four members of the committee voted for a more aggressive interest rate hike to 0.75%. The MPC stated that evidence of domestic inflation pressures and a tight labour market indicated that a rate increase was needed. The bank upgraded its peak inflation forecast to 7.25% for the second quarter while growth forecasts were downgraded with the 2022 GDP increase now seen at 3.75% from 5.0% previously.
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The Euro-zone PMI services-sector index was revised marginally to 51.1 from the flash reading of 51.2 with both the Italian and services sectors dipping into contraction. The ECB held interest rates at 0.0% following the latest policy meeting, in line with consensus forecasts and the Euro edged lower in an immediate response. Bank President Lagarde stated that inflation surprises caused unanimous concern within the council and that the Euro area is no longer in a low inflation environment. She added that the March and, especially the June meeting, will be essential in evaluating guidance. Inevitably, Lagarde was pressed on whether a rate increase was still very unlikely in 2022. Lagarde did not repeat the comment with markets drawing their own conclusion from the more hawkish commentary.
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10:00 EUR Retail Sales Forecast 5.1% Previous 7.8%
The latest US employment report will be released on Friday with expectations of a weak increase in payrolls, although wider data including wages will also be important. The dollar remained on the defensive on Friday with the more hawkish ECB tone continuing to boost the Euro as it at traded at fresh 2-week high.
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13:30 US Non farm payroll Data Forecast 6.2% Previous 5.9%