GBP

The Pound jumped sharply yesterday but ultimately failed to hold onto its gains after the Bank of England shocked the market when they voted to raise interest rates to 0.25%.

The central bank voted almost unanimously at 7-1 to raise the base interest rate by 15 basis points, with Tenreyro the only member to vote against a hike, arguing for a wait a see approach with the new omicron variant currently circulating. The Bank of England also stated that they expect inflation to remain around the 5% level throughout the majority of the winter period, potentially leaving the door open for a further hike in February.

The UK also delivered better than expected retail sales figures, coming in at an increase of 1.4% instead of the expected 0.8%. Markets seemed to overlook this positive release as the Pound continued to be sold off in the afternoon session as the focus turned back to coronavirus worries. The UK recorded a record number of cases for the second day running with 88,376 new cases confirmed.

There was also a record day for the rollout of the booster jabs with 745,183 being administered yesterday. To add further pressure to an already struggling government, the conservatives lost a by election for North Shropshire, a seat they have held for almost 200 years. This result comes after Prime Minster Boris Johnson experienced his biggest rebellion in office, with 100 conservative MPs voting against his covid passes.

Huge pressure also remains on worries over parties held by the conservative party during lockdown last year with new stories claiming Boris Johnson himself hosted a party in May last year whilst the country banned the mixing of 2 households.

EUR

The Euro was strengthened yesterday as although the central bank kept interest rates on hold they did announce plans towards asset tapering. The expectation is for net asset purchasing to end in 2023 and for the ECB to look at their first rate hike in late 2023. The move towards removing stimulus over the coming quarter caught move investors off guard, however the ECB did emphasize policy flexibility. This news provided an initial bounce for the single currency, however this also faltered in the afternoon session.

Key announcements

10.00 EU CPI data, expected to drop to 0.1 MoM, but remain at 2.6% YoY