Yesterday's price action on GBP was very telling following that higher than expected inflation number. In general higher inflation will raise the prospect of higher interest rates to come; but, as we have documented in our recent market reports, markets have already priced in the expectation for the Bank of England needing to hike interest rates to 6% - so it seems this is peak pricing from the market. However, thoughts in the market are now leaning towards the prospect of rising inflation choking the economy into a recession, and this fear is now causing negative sentiment on GBP. It may be very early to make this call but today's price action following the BoE rate decision could add more conviction to this train of thought.
Fed Chair Powell’s testimony on the economy and interest rates was broadly in line with the recent FOMC meeting.
* Daily move - against G10 rates at 7:30am, 22.06.23
** Indicative rates - interbank rates at 7:30am, 22.06.23
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The US dollar remains on the back foot after the interest rate hiking pause at the recent FOMC meeting, although Fed Chair Powell yesterday reiterated the Fed remain committed to bringing inflation back down to their 2% target, which may well result in further monetary policy tightening.
Sterling eases despite being supported by higher bond yields as recessionary fears increase, after peak UK interest rate pricing surges to over 6%. Markets are fully pricing in a 0.25% rate hike at today’s MPC meeting, and following yesterday’s stronger than forecast inflation data a 30% probability of a 0.50% rise.
The hawkish mood music from the ECB appears to be changing, as some members are now placing more importance on how long interest rates remain at elevated levels, rather than how high they push up the terminal rate.
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