Markets disappointed with Federal Reserve’s rate hike

GBP

Although the Bank of England increased interest rates by another 25 basis points bringing it to 0.5%, Sterling fell over a one percent on Friday. Four of the committee members however voted to increase rates by 50 basis points instead of the 25 bps, as UK inflation is set to surge to 7.25% in April.

It is projected that further rate hikes are coming and sooner than expected. The BoE could yet meet the market’s expectations to deliver 100 basis points of rises by year end.

The main reason for the unexpected loss for Sterling was mainly due to Thursday’s announcement from European Central Bank President Christine Lagarde. She stated expectations of faster policy tightening to attempt to combat the rising inflation in the Eurozone, but stressed that the ECB would not rush into any decision.

USD

On Friday we saw Non-Farm Payroll data released, which was expected to be recorded at 150k new jobs but came in well above expectation with 467k Non-Farm jobs in January. This is way more than analysts had forecast even before ADP’s assessment that private sector jobs fell by 300k last month. Even more striking is that the government revised up payroll data for November and December by a combined total of over 700k.

The market’s first reaction was negative after assuming that the numbers will encourage the Federal Reserve to raise interest rates by half a percent at its meeting in March, rather than the 25 basis points it has so far guided for. However, the figures also validated the underlying strength of the economy, which now appears much closer to having recouped the jobs it lost due to the pandemic in 2020.

Key announcements

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