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Volatility seen after central bank comments

Daily Currency Update

The Bank of England (BoE) policymakers hiked interest rates by a further half a percent on Thursday. The votes once again were split with seven agreeing to a rate increase and two wanting to hold rates at 3.5%, the same vote split seen in January. UK Interest rate now sits at an 8-year high of 4% to tackle the double-digit inflation and bring it back down to the target of 2%. As the rise was expected by market participants, it was the surrounding comments that drove volatility in the Pound. From the following press conference, it is now believed that the BoE is laying the groundwork for the end of the current tightening cycle. Although interest rate hikes are planned, they may be expected to minimize from the recent 50-basis point hikes and with no guidance as to how long they will continue. GBP/USD which had tested 1.2400 after the US interest rate announcement Wednesday evening, has now fallen to 1.2200 this morning. GBP/EUR has also dipped, falling to a session low of 1.1180 yesterday.

Final services PMI is the only domestic data for Sterling to take direction from this morning with MPC member Pill due to speak about the latest interest rate decision at the Monetary Policy report briefing this afternoon. The key data for GBP/USD will come from the US as we anticipate employment data around 1:30 pm and ISM services PMI later in the afternoon.

Key Movers

The European central bank (ECB) raised interest rates by 50 basis points in line with expectations. The ECB also committed to a further 50-basis point hike at the next meeting in March but offered no clarity on hikes thereafter. President of the ECB Lagarde in the following press conference highlighted a more balanced outlook to inflation and stated, after the March meeting, the ECB will evaluate the subsequent path of its monetary policy. The lack of guidance spooked market participants which had been well informed prior to the meeting as to the plan from the central bank. EUR/USD dropped from the 10-month highs seen prior to the meeting (1.1030) down to 1.0880. The Sterling lost ground against the Euro, but this was due to both central banks giving their latest decisions within hours of each other. Data will now play an important part in the decision-making of the European monetary policy committee beyond March, so the EUR movement may be sensitive to key releases.

Expected Ranges

  • GBP/USD: 1.2190 - 4.231 ▼
  • GBP/EUR: 1.1180 - 1.1250 ▼
  • GBP/AUD: 1.7270 - 1.7420 ▼
  • EUR/USD: 1.0880 - 1.1020 ▼