US Open Note – Euro in lively bullish party after ECB; BoE fails to boost pound after rate hike

Bank of England hikes rates

Abandoning its communication fiasco of late last year, the Bank of England (BoE) delivered its first back-to-back rate increase in almost two decades, lifting interest rates by 25 basis points to 0.50% as widely expected.

Consistent with its guidance, the committee also judged that it should cease reinvesting the maturing government bond purchases of its portfolio in a gradual and predictable manner, reiterating that it would initiate the process of selling (quantitative tightening) once the benchmark rate rises to 1.0%.

What previously looked like a temporary disorder of the pandemic, inflation has become a sticky phenomenon from mid-2021 onwards, with the central bank elevating its price growth forecasts to 7.25% by April and seeing it at 5.21% in a one-year time from 3.40% previously. Four of the nine voting members wanted the central bank to act even more aggressively, hiking borrowing costs at a faster pace of 50 bps to 0.75%, looking past the pandemic uncertainty, and perhaps sacrificing some economic growth with an eye to quickly putting out the inflation fire.

Yet, the rate hike parade could see further continuation in the coming months if the economy moves in line with February’s projections, though whether it would be a fast or gradual process remains to be seen, the BoE chief Andrew Bailey said.

That uncertainty and the dependence on future economic developments have likely canceled the pound’s immediate bullish reaction, pressing pound/dollar back to 1.3605 after a peak at a weekly high of 1.3627. Likewise, it immediately lost its shine versus the euro, pulling back to 0.8357 per euro after touching a new two-year high at 0.8338.

In other pound pairs, however, pound/yen is still maintaining its upside momentum for now, peaking at 156.47.

ECB stands pat but Lagarde boosts euro

Meanwhile in the Eurozone, the European Central Bank’s (ECB) policy announcement did not shoot any fireworks, but Lagarde's press conference provided the much needed boost to the euro.

Sticking to the initial plan, the board kept its deposit rate unchanged at a record low of-0.50% as analysts forecasted despite inflation ticking to a fresh multi-year high in January.

The only adjustment was the removal of the wording that monetary policy could change in either direction, but the euro was broadly unaffected in the aftermath until Lagarde’s inflation comments during her press conference revived sharp bullish pressures, sending euro/dollar rapidly up to 1.1378. Particularly, the ECB chief sounded hawkish after admitting that inflation could “remain elevated for longer than expected”, signaling that price growth could climb beyond January’s high of 5.1% in the near term. Investors, however, will probably wait for additional clarification during the March meeting when the central bank updates its economic projections.

Euro/yen staged an impressive rally as well, flying straight up to 130.89 from 129.47 before the press conference started. That is the largest daily increase in a long time.

The German 2-year government bond yield soared to -0.326%, the highest since 2016, while the longer-term 10-year equivalent unlocked a three-year high at 0.14%.

Futures markets are currently pricing three rate hikes of 10bps with a stronger probability.

Stock markets

Turning to stock markets, Meta, the owner of Facebook, cautioned investors with a loss of a million daily users worldwide and a stagnation in its most profitable Canadian and US markets during its post-market earnings call on Wednesday, squeezing the Meta stock lower by 22%. Besides a worse-than-expected decline in profits, CEO Mark Zuckerberg, who is pivoting the company’s future to a virtual world while heavily involved in antitrust battles, flagged a potential growth slowdown in revenues in the first quarter of 2022, citing a reduction in time spent on its services, inflation headwinds in advertising spending and Apple’s ad-tracking changes.

The company’ brilliant performance during the past two years has been a key driver of the global stock record rally. Hence, yesterday’s depressing results could easily put this month’s upturn in US indices on hold for now, while Amazon’s earnings after the closing bell today could be the next test for the high valued tech sector.

Futures tracking the Nasdaq 100 were heavily down by more than 2.0% during the time of writing. The S&P 500 is set to open 1.0% lower, while the Dow Jones could trade with softer injuries when the US session starts.

Tech shares in the European STOXX 600 are not in a better place today, plunging by 1.24%. Utilities and energy shares have so far escaped the plunge, remaining stable in the day.


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