Home Daily Commentaries Focus turns to the BoE and ECB today

Focus turns to the BoE and ECB today

Daily Currency Update

UK manufacturing has faced a tough start to 2023. Output and new orders fell further, leading to job losses for the fourth successive month. Although the downturn showed signs of easing, production was impacted by weak demand, elevated price inflation, and shortages in raw materials and staffing. This data followed news earlier in the morning that the house price index fell for a fifth straight month according to Nationwide. Data elsewhere supported Sterling volatility as the US Federal Reserve confirmed a 25-basis points interest rate increase.

This came as no surprise to market participants, but chair Powell's dovish comments confirming the disinflationary process is underway. The lowering of inflationary concerns from the US has supported risk appetite which sees market participants sell the USD as a safe haven in the demand for riskier assets. GBP/USD jumped from 1.2295 pre-release to 1.2400 overnight and GBP/EUR slipped further to 1.1240.

Focus now shifts to today’s interest rate announcement from both the Bank of England (BoE) and European Central Bank (ECB). No surprises are likely to be expected from the ECB this afternoon with the anticipated 50-basis point hike.

The BoE announcement is trickier to gauge as a split vote was seen at the previous meeting. However, a 50-basis point hike is a forecast. A deviation away from either of these announcements will likely add further volatility to today’s movement, but the comments surrounding the announcements could be scrutinized for future guidance.

Key Movers

Data around the US interest rate announcement yesterday showed non-farm employment change and manufacturing PMI fall below forecast. Private sector employment increased by 106k jobs in January and annual pay was up 7.3% but was below the 176K target and a fall from the previous months’ 253k. Manufacturing remains within contraction territory – 47.4 actual versus forecast 48.00. Job openings and labour turnover survey (JOLTS) painted a prettier picture, showing job openings surged past 11mio.

The Fed announcement overshadowed these releases yesterday by raising interest rates by 25 basis points. It was the surrounding comments from Fed Chair Powell that added volatility to markets as he stated a corner had been turned in the fight against a high inflation rate. Although ongoing increases in borrowing costs are likely, the disinflationary process is underway. Expectations have now risen that a so-called soft landing is possible – inflation eases against a backdrop of weakening but resilient economic growth. The USD was sold on the news, taking GBP/USD to an overnight high of 1.2400 and EUR/USD touched 1.1025. Both currency pairs are a little softer against these highs, but the majority of gains remain.

Expected Ranges

  • GBP/USD: 1.2250 - 1.2440 ▲
  • GBP/EUR: 1.1180 - 1.1360 ▼
  • GBP/AUD: 1.7210 - 1.7500 ▼
  • EUR/USD: 1.0820 - 1.1120 ▲