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BOE hikes but hints we are near the top

By lifting their base rate by 50 basis points yesterday, the Bank of England matched the ECB and brought the UK base rate back up to 4.0% for the first time since 2008. However, they also hinted that we may be near the top of the spike when it comes to interest rates. That makes sense when you consider that inflation data will start to shed some of the rapid rises we saw last year in the wake of the Ukraine invasion and its consequences for energy and food prices. It does seem extraordinary that a whole generation of people have seen virtually zero interest rates for 14 years and some will never have witnesses the true impact of normal interest rate levels. The market reaction says it all really. A spike in the value of the pound after the rate hike was followed by a slump in the wake of the dovish comments. Ahead of this morning’s UK purchasing managers indices, the pound is down to $1.2195 against the USD, having been up to $1.24 at yesterday’s height. Following the ECB’s rate hike and more hawkish comments, the pound is down against the euro to €1.12 and just below. The next big hurdle for the pound is next Friday, when the GDP data for Q4 will be released.

ECB raises rate by 50 BP and moots more

The ECB hiked their base rate by 50 basis points yesterday, just as we all thought they would but they also heralded a further 50BP rise next month. They were a little cagey about what might happen after that but the markets appear to be fairly convinced that the epic levels of inflation we have seen recently are soon to abate and central banks can go back to sleep for a while. We can only hope that, with the base rate back up to 3.0%, the highest since 2008, the worst of the increased cost of borrowing may soon be over. The Foreign Exchange market reaction was to buy the euro an then take profits on those moves. So, the EURUSD rate shot up to nearly $1.1025 and then fell again to this morning’s $1.0895. The GBPEUR rate was a little more one directional. This pair started the week above €1.14 but we are below €1.12 this morning. Great opportunities for GBP buyers methinks. We lack any tier one eurozone data today, so the euro will be wafted about by events in the UK and US.

US employment report dominates the day

Now that all the central banks have done their thing, the markets’ eyes turn to the US employment data. The fabled non-farm payroll number is at the heart of this release and the pace of job creation is expected to have slowed somewhat. There are many who expect the unemployment rate to have ticked higher to 3.6% as well. To be fair, that is about as close to full employment as any economy can get, so we shouldn’t be surprised. However, the fact that data is starting to plateau does suggest the US Federal Reserve is right in suggesting their monetary tightening cycle may be reaching it climax. The US dollar is well supported ahead of this data. As mentioned above, GBPUSD is below $1.22 and EURUSD is back down below $1.09. If the employment data is any worse than forecast, w can expect some USD selling.

NZD benefits from improving Asian data

Can we wish all our New Zealand readers a Happy Waitangi Day and have a good long weekend. The NZ dollar is strengthening, which will help with the cost of imported goods. The move is being driven by improving data from the Asian region and especially the behemoth Chinese economy. As China emerges from its self-enforced lockdowns, we can see the rise in confidence within the Caixin service sector purchasing managers index.. That is up to 52.9 from the previous level of 48.0; lifting the index to optimism from pessimism, 50 being the divide between the optimism & pessimism ranges. The result of all this is that the Kiwi dollar is down to NZD1.8850 against the pound for the first time since September 2022. This is a terrific opportunity for those who need to sell NZD to buy GBP.

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