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Market Update

The British pound fell to a 16-month low against the U.S. dollar, ahead of monetary policy updates from the Bank of England and Federal Reserve later in the week.

Both the BoE and Fed are seen raising their main interest rates by 25 basis points at their respective meetings taking U.S rates to 50 bps and BoE to 75 bps.

Money markets are currently pricing in 163 basis points of monetary tightening from the Bank of England this year, equivalent to at least six 25 basis point rate increases.

ING thinks the market pricing is too aggressive but doesn’t see the central bank scaling back market expectations for rate rises this week as they might favour a stronger pound.

We say this because UK CPI looks set to push up towards the 8% year-on-year area in April and the BoE probably prefers a strong pound to try to alleviate some of the pressure from imported energy prices

As Russia remains the biggest topic and mover of money markets, we saw sterling trade as a 2-year low against the dollar and GBP/EUR trading below the 1.1950 mark. The ECB had an eventful week with their monetary policy, the deposit facility rate was held at negative 50 bps in hopes to discourage institutions from saving and stimulate spending.

ECB’s interest rates were also held at 0.00% however President Lagarde’s tone reinforced that the Russia-Ukraine war will not stop “the ECB’s mandate to pursue price stability and to safeguard financial stability” which pushed the euro lower against the dollar.

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