Hawkish statements from the European Central Bank and Bank of England raised demand for euro and pound. Both central banks announced increases in interest rates to curb inflation, bringing back the risk appetite of investors.
In the Bank of England, members called for a more aggressive response to rising prices, voting to raise the key interest rate by 25 basis points to 0.5%. Four members even pushed for a 50 basis point hike, which would be unprecedented since the central bank gained independence from the government in 1997.
The move was a pretty serious response to inflation, especially at a time when the Bank of England has around £895 billion debt on its balance sheet. It came shortly after Chancellor Rishi Sunak announced a new £9 billion program to help consumers pay rising electricity bills.
The UK central bank is the first one to tighten its monetary policy. The Federal Reserve only plans to do so in March. And given the current inflationary pressures, further tightening is likely to be implemented in the coming months. However, much will depend on how the economy reacts to these changes, for example, if there is a huge increase in electricity bills and taxes.
"The challenge is clear: to return the inflation target to an acceptable level, reflecting the priority of price stability in the UK's monetary policy," said the Bank of England.
If before the central bank projected a 6% increase in inflation, the latest forecasts predict a rise to 7.25% in April. That is way higher than the Bank of England's target of 2%.
The labor market also remains tight, so the Bank of England revised its wage growth forecast to 4.75%. Also, rising energy prices, fueled inflationary pressures, which offset the rise in the cost of living. And despite an improved wage outlook, the Bank of England warned that real household incomes will fall both this year and next. This dip will drive unemployment up to 5% and lead to recession in the economy.
Against this backdrop, four officials - Dave Ramsden, Michael Saunders, Catherine Mann and Jonathan Haskel - voted to raise rates by 50 basis points. Meanwhile, the majority, including Bailey, were in favor of a 25 basis point increase.
ECB
Rising prices in the Euro area increased the likelihood of an interest rate hike by the European Central Bank. In fact, shortly after the policy meeting, ECB President Christine Lagarde said they are starting to be increasingly worried over the rapid rise of inflation.
Lagarde also made a number of surprisingly blunt comments following yesterday's decision to leave the current monetary policy unchanged. At present, ECB officials are not going to jump to conclusions as it is necessary to wait for new statistics to have a better judgment on whether the central bank needs to change its stance on monetary policy. She said the meetings in March and June will be critical to determine whether their set criterias will be met. Some economists believe that the central bank will raise rates by 10 basis points in June, and then implement another 40 basis point increase at the end of the year.
Lagarde also mentioned continued signs of supply chain problems that were holding back manufacturing companies and pushing up costs. She said that even though the problem is starting to ease, it is still difficult to say when it will disappear. Wage growth also remains broadly muted
Technical analysis for GBP/USD
The breakdown of 1.23625 will provoke a further increase to 1.3660 and 1.3700. Meanwhile, a drop below the level will prompt a dip to 1.3550, and then to 1.3495 and 1.3455.
Technical analysis for EUR/USD
The breakdown of the 14th figure will result in a jump to 1.1450 and 1.1480, while a drop below this level will lead to a decrease to 1.1350. If selling pressure intensifies, the pair will move lower to 1.1270.
