NZD carried higher on coattails of euro rally and hawkish ECB

Key Movers

The euro was the days big mover, surging back above 1.14 to touch intraday highs at 1.1450, following a shift in ECB rhetoric and a prompt uptick in rate hike expectations. While the ECB maintained its policy stance, ECB president Christine Lagarde lead a shift in rhetoric, acknowledging inflation risks were to the upside and well above the ECB target rate and refused to rule out a possible rate hike before the end of the year. Given Lagarde suggested any rate adjustment was highly unlikely just last month, this is a sharp and direct pivot in message, driving markets to adjust policy expectations. In the moments following the press conference markets increased bets on a rate hike of 10bps in June and 40bps by year end. Bond yields were up across near-and long-term yields while the euro benefited, rallying 1% on the day.

Not to be outdone, the Bank of England raised rates by 0.25% taking the base line cash rate to 0.5%, a critical level as it will now see the Bank stop reinvesting within its bond portfolio in a bid to correct the balance sheet. Markets had priced in the move, but were surprised to find four of the nine policy members pushed for a 0.5% rate hike, suggesting the board is split on the best path forward and that a more aggressive approach may be adopted in the future. Sterling pushed through 1.36 to touch intraday highs at 1.3630.

The euro and GBP gains have forced the dollar index back below 96 and 95.50, marking intraday lows at 95.24.

Attentions today turn to US non-farm payroll data. After Wednesday's dour ADP employment print, markets will be keenly attuned to any significant downturn in labour market performance. With recent Fed commentary suggesting a slow and measured adjustment to interest rates remains prudent, any slowdown in the labour market recover could further dampen prospects of an aggressive interest rate realignment.