Gentium FX | Daily Report - 17th March 2022 - Bank of England Interest Rate Decision In Focus

Investors are widely expecting the Bank of England to hike interest rates to 0.75% today. The market prices the interest rate at over 2% by the end of 2022. Sterling enters the March policy decision as the worst performing G10 currency of the past month although it does look like sentiment towards the Pound may have become overly pessimistic having been the best performing G10 currency until mid-February. Hiking interest rates is the Bank of England’s way of insulating against higher natural gas prices and inflation. If we see some renewed votes for a larger hike this month then we could see Sterling benefit in the short term. On the other hand, if some Monetary Policy Committee members decide against a rate hike then we could see Sterling on the backfoot come midday.

The Federal Reserve in the US has increased interest rates by 25bp with officials forecasting an additional six hikes in 2022. This is the first time the Fed have hiked rates since 2018. More interestingly the Fed sees the momentum for higher rates continuing into the 2023 with the bank rate expected to hit at 2.8% in 2023 before coming down to 2.4% in 2024. The standout market reaction since the announcement last night was the strong equity rally worldwide as the Fed meeting suggests investors believe that the Fed is acting to get inflation under control. A risk-on environment is generally seen as a Dollar negative as cash flows leave from the safety of the Dollar. Furthermore, there were cautious signs of progress regarding the Russia-Ukraine conflict.

Today we also hear from several European Central Bank speakers including President Lagarde. After the Federal Reserve’s hawkish message, there are reports suggesting the ECB may now raise expectation for the Eurozone interest rate to be raised between 30 – 50 bp by 2023. In the early European trading sessions, Euro area borrowing costs pushed higher with the German 10-year Bund yield touching 0.408% - the highest level since 2018.