Market anticipating a volatile week with Central Bank meetings in focus, US labour market expected to underwhelm
We are entering a very busy week ahead, with central bank meetings and key risk events on the horizon:
The GBPEUR rate maintained upward momentum in last week trade, but this week’s tug-of-war over 1.14 will determine its immediate future, and the GBP might lose value if the market believes that the Bank of England (BoE) will be less hawkish than expected on Thursday when the MPC meet.
Top of the list of this weeks key economic events are a trio of interest rate decisions, with the US Federal Reserve, the Bank of England and the European Central Bank all set to raise the cost of borrowing. After that, Fridays US non-farm payrolls is next on the agenda.
Wednesday – US Federal Reserve interest rate decision:
The Fed seems split over whether to raise rates by half a percentage point or to step down to a quarter-point increase. Most analysts expect the latter. But with markets pricing in a terminal rate below the Fed’s target of 5% or above, there is a risk that inflation could become stickier unless the Fed resets expectations. If the Fed opts for a 0.25-point rise, the accompanying guidance is likely to foreshadow further rate hikes down the line.
Thursday – Bank of England interest rate decision:
Having raised the base rate by 0.5 percentage points to 3.5% in December to combat double-digit inflation, the Bank of England – like its US counterpart – appears torn over whether to plump for another half-point rise or slow down to 0.25 points. Whatever happens, the Monetary Policy Committee’s vote is unlikely to produce a unanimous decision.
German GDP:
German GDP fell by 0.2% in the October-December quarter, statistics body Destatis has reported. That’s worse than expected – economists had forecast that GDP would be flat. Germany’s economy was hit by soaring energy prices at the end of last year, driving up the cost of living. Inflation hit 11.6% in October, as Russia squeezed energy supplies to Europe.
A recession is commonly defined as two successive quarters of contraction, so Germany would be in recession if its GDP shrinks in the current quarter (January-March) as well.
Spanish CPI:
The EU harmonised Spanish inflation data was released this morning, with the figure coming in at 5.8% - well above the forecast of 4.7%. This is likely to add to expectation that the ECB will hike rates at their meeting on Thursday.
Ahead of the European Central Bank's (ECB) policy announcements later in the week, however, investors are unlikely to react to the German GDP figures and Spanish CPI in the interim.
ECB - Rate Hike Decision:
A rate hike of 50-basis points to 3% from the ECB when it meets on Thursday looks like a done deal – but what happens next remains unclear.
Market analysts will be on the lookout for indications of how much further and how fast officials intend to go. ECB President Christine Lagarde will likely remain hawkish as core inflation remains stubbornly high, despite growing dissent among policymakers, with more dovish voices arguing that inflation has retreated from record highs. Policy hawks are pushing for more of the same in March, with inflation still well above the ECB’s 2% target.
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