GBP

Sterling gave up earlier gains against both the euro and dollar yesterday. This followed the Bank of England (BoE) stating it needed clear evidence of an economic recovery before tightening monetary policy. The move mirrored recent decisions in the United States, with the Federal Reserve taking a similar stance.

A sell off in sterling soon ensued, with investors underwhelmed by the news as commentary leading up to the meeting suggested the bank could make a taper announcement. Instead, the bank voted unanimously 0-9 to keep rates on hold and 1-8 to keep the asset purchase programme unchanged.

The bank did announce the rate of bond purchases will slow £3.4bn per week from £4.4bn but insisted this was merely a technical adjustment and shouldn’t be interpreted as a shift in monetary policy stance.

Chief economist Andy Haldane was the dissenter, voting to cut the current quantitative easing programme from £875m to £825m citing evidence the UK economy is growing. Markets shrugged this off as Haldane, arguably the most hawkish on the committee, recently announced he would leave the bank next month.

On a positive note, the BoE did acknowledge the UK is likely to see accelerated growth and inflation this year with the economy returning to pre-Covid levels. As a result, the BoE now expect the UK to hit its 2% inflation target and upgraded growth forecasts for GDP from 5% to 7.5% this year.

Usually this would result in a surge for sterling. However, investor focus turned to the 2022 forecasts which the bank lowered saying the rise in growth and inflation is expected to only be temporary with the GDP figure pulling back to 5.75%. It’s likely the bank’s cautious stance on inflation and GDP for 2022 has put a lid on any earlier investor optimism relating to the 2021 forecasts.

USD

The dollar was the beneficiary of two positive data releases yesterday. Both Flash US Non-Farm and US initial jobless claims exceeded expectations improving the outlook for the world’s biggest economy.

The positive data follows comments earlier in the week from US Treasury Secretary Janet Yellen that interest rates may have to move higher to ensure the economy doesn’t overheat.

EUR

Retail sales (YoY) (Mar) beat expectations to read 12% despite most of Europe struggling with lockdowns.

Key announcements 

11:00 – EUR – ECB President Lagarde speech

13:30 – USD – Non Farm pay rolls expected 978,000

13:30 – USD – Unemployment rate (Apr) expected 7.8%

16:00 – USD – President Biden Speech