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BoE send GBP lower despite 75bps rate rise

Good morning

So FOMC raise rates 75bps and USD marches higher. BoE raise rates 75bps and GBP take a tumble. Other than the rate rise, the message was dovish. While all nine members voted to raise rates, only seven voted for 75bps. Dhingra voted for 50bps, while Tenreyro looked for just 25bps. In contrast to the Fed, who said rates would move higher than originally expected, BoE made it clear the peak rate will likely be lower. Some are thinking BoE won’t go above 4%. The outlook is pretty gloomy, GDP is expected to fall for at least six consecutive quarters, and that could be longer if we get more rate rises on the way. Tax rises seem to be on the cards, Chancellor Hunt looking at possibly increasing tax on dividends.

GBP lost ground on the pessimistic outlook. GBPUSD has been in decline since the FOMC announcement, started the day up near 1.1400 but traded as low at 1.1155 by the evening. GBPEUR was down from 1.1600 to 1.1440, GBPAUD from 1.7975 to 1.7725. It was the same story against most other currencies. The medium term outlook is not looking good, that’s for sure, and the comfort I felt when GBPUSD was above 1.1500 earlier this week seems a world away.

USD did weaken a touch overnight, GBPUSD is back to 1.1220, EURUSD currently 0.9775, which puts GBPEUR at 1.1480, about 40 pips up from those overnight lows.

China shares have surged higher overnight, up around 3%, while the Hang Seng was up over 5%, fuelled by rumours of a forthcoming substantial change in Beijing’s Covid policy. We have seen such talk before and it does get snuffed out fairly quickly but there is a feeling that something will have to give. Was reading that a major supplier to Apple have now begun manufacturing in India. Trade wars and Covid could see more manufacturing move out of China, perhaps Xi is aware of this. I am no expert on daily life in China but I wonder whether they have limited medical facilities for their citizens, certainly outside of the big cities, and are wary of Covid taking hold again and putting hospitals under extreme pressure. Reminds me, I need my Covid booster.

Before we can head off for the weekend we must face the US nonfarm employment numbers. A strong reading here could cement the USD strength we have seen over the past couple of days, however I have seen a couple of banks looking for a low headline numbers. Consensus is for something around +200k, but I’ve seen one looking for as low as +125k. Would this be enough to dent USD fortunes as we near the end of the week.

Have a great weekend if we don’t speak before. Bit of sunshine out today but I’m not sure it’ll hang around into the weekend. Looks like a particularly damp weekend actually so if you have any chores to do outside, best get them done today. Mind you there are leaves all over my lawn again but with the US data today there is no way I will be able to clear them today. That’s my excuse anyway!

- 09.30 ECBs Lagarde speaks

- 12.15 BoEs Pill speaks

- 12.30 US nonfarm payrolls

- 12.30 CAD employmenmt

- 14.00 CAD Ivey PMI

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