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BOE officials divided over future rate hikes

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Written by:
Myrsini Giannouli

10 February 2023
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Important calendar events

  • JPY: PPI, Preliminary Machine Tool Orders
  • GBP: Monthly GDP, Preliminary GDP, Construction Output, Goods Trade Balance, Index of Services, Industrial Production, Manufacturing Production, NIESR GDP Estimate, MPC Member Pill Speech
  • USD: Preliminary UoM Consumer Sentiment, Preliminary UoM Inflation Expectations, Federal Budget Balance, FOMC Member Harker Speech


The dollar dipped on Thursday, with the dollar index dropping to 103.1. US Treasury yields also retreated, with the US 10-year bond yielding close to 3.62%.

US Unemployment Claims on Thursday exceeded expectations, putting pressure on the dollar. Unemployment claims this week rose to 196K, against expectations of 191K and a previous print of 183K.

Fed rhetoric this week remained hawkish, albeit less than expected. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeated speeches by Fed members though have begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for a long period. 

On Wednesday, FOMC member Williams emphasized that a restrictive stance must be maintained for a few years, but did not commit to a specific ceiling for the Fed’s interest rates this year. Fed’s Cook on Wednesday was more hawkish, stating that the central bank aims to restore price stability, which will require a restrictive monetary policy for some time.

After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy. The Federal Reserve raised interest rates by only 25 basis points last week, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. However, a pivot towards a more dovish policy was expected by markets and had been largely priced in. 

Fed Chair Jerome Powell, at his press conference after the conclusion of the meeting defended the central bank’s decision to relax its hawkish policy. Powell caused a stir in markets, expressing himself as satisfied with the ‘disinflation’ process. Powell emphasized that ongoing rate hikes are appropriate since substantially more evidence is necessary that inflation is under control. On Tuesday, Fed Chair Jerome Powell confirmed that the disinflation process has begun but emphasized that it still has a long way to go. Powell’s speech was cautious, reinforcing that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy. 

Many analysts believe that the Fed will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means there are likely still a couple of rate hikes up ahead, which may support the dollar. Rate hikes have become less aggressive, but the Fed might continue raising interest rates for longer than previously expected.

US inflation seems to be cooling, as US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures have given the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar. 

Advanced quarterly GDP data revealed that the US economy is expanding at a higher rate than anticipated. US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease. 

Preliminary UoM Consumer Sentiment, Preliminary UoM Inflation Expectations, and Federal Budget Balance are due on Friday for the US and may cause some volatility in dollar prices.



The Euro traded sideways against the dollar on Thursday, with EUR/USD oscillating around the 1.073 level. If the currency pair goes up, it may encounter resistance near 1.103. If the EUR/USD pair declines, it may find support at 1.048. 

German Preliminary CPI on Thursday exceeded expectations, indicating that price pressures remain high for the Eurozone’s leading economy. German CPI rose by 1.0% in January, against expectations of a 0.9% growth and a drop of 0.8% in December. German CPI rose by 9.2% year-on-year in January.

The ECB meeting raised interest rates by another 50 bp last week, bringing its main refinancing rate to 3.0%. The rate hike was in line with market expectations though and had already been priced in. 

ECB rhetoric this week remained strongly hawkish. ECB’s Kazaks stated on Wednesday that the central bank has no reason to pause rate hikes after next month's meeting. ECB member Knot also appeared to be in support of further rate hikes, emphasizing that the ECB has more distance to cover than the Fed.

ECB President Christine Lagarde gave a press conference with hawkish undertones after last week’s ECB meeting. Lagarde emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June. Even though the ECB seems prepared to continue raising interest rates to bring inflation down, the market response was negative towards the Euro, which plummeted. 

EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise significantly to combat entrenched inflation.

EURUSD 1hr chart



The Sterling gained strength against the dollar on Thursday and GBP/USD inched higher, rising to 1.212. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while further support may be found near 1.284. 

On Thursday, BOE Monetary Policy Report Hearings may cause some volatility in the price of the Sterling. During these hearings, BOE Governor Bailey was joined by MPC members, Pill, Tenreyro, and Haskel at the Treasury Select Committee to testify on inflation and the economic outlook before Parliament's Treasury Committee. Thursday’s hearings indicated that BOE officials are divided over the central bank’s future monetary policy. MPC members Haskel and Pill appeared to be hawkishly advocating for further tightening, BOE Governor Bailey seemed to be on the fence on further rate hikes, while MPC member Tenreyro stated she may consider voting for a rate cut. The dichotomy between MPC members does not bode well for the British economic outlook, as there is a high risk that inflation will become entrenched. 

The outcome of the BOE monetary policy meeting last week was perceived by markets as dovish, putting pressure on the Sterling. The BOE raised interest rates by another 50 bp last week, bringing the official bank rate to 4.0%. The rate hike fell in line with market expectations and had already been priced in. 

The BOE Monetary Policy Report issued after the meeting, however, was more dovish than expected, pointing to a possible pause in rate hikes. The policy report stated that “if there are more persistent price pressures then only will further tightening be required”.

Inflation data have shown that inflation in the UK is cooling. UK headline inflation dropped to 10.5% in December from 10.7% in November. With inflation remaining firmly above 10% though, additional measures would be required to bring price pressures down.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year. The final GDP print for the third quarter of 2022 was -0.3%, indicating that the economy in the UK is shrinking. The British economy is still struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down. 

A report by the National Institute of Economic and Social Research on Thursday showed that Britain’s housing market suffered the most widespread price falls since 2009 last month due to increased rates.

UK GDP data are scheduled to be released on Friday and are likely to affect the Sterling due to the current precarious state of the British economy.

GBPUSD 1hr chart



The Yen traded sideways against the dollar on Thursday, with USD/JPY oscillating around the 131.1 level. Currently, the USD/JPY rate is driven primarily by the dollar’s direction, as markets weigh in on the implications of the Fed’s dovish shift. If the USD/JPY pair declines, it may find support near 127.2 and further down at 114.2. If the pair climbs, it may find resistance at 131.6. 

Rumors have already surfaced this week regarding the successor of BOJ Governor Haruhiko Kuroda. Kuroda is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy. A pivot in Japan’s monetary policy within 2023, would boost the Yen considerably. 

The Japanese Government has reportedly approached Deputy BOJ Governor Masayoshi Amamiya for the position of BOJ Governor, although Japanese government officials have since denied this. Amamiya is also a firm supporter of the central bank’s ultra-loose monetary policy, though. A change in leadership with Amamiya at the helm would probably make little difference to BOJ policy. Market reaction reflected this eventuality, and the Yen tumbled after the rumors surfaced. 

Next week, Japanese Prime Minister Fumio Kishida is due to submit nominees for BOJ Governor to parliament. On Wednesday, Kishida highlighted the prerequisites for the new head of the BOJ. Kishida stated in Parliament that, “Since the Lehman crisis, close coordination among major central bank leaders, as well as the ability to receive and deliver high-quality communication to and from domestic and overseas markets, have become extremely important". There are rumors that this description fits former BoJ Deputy Governor Hiroshi Nakaso, although it is as yet unclear if he would be willing to take up the post. 

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10% as expected. BOJ Governor Kuroda defended the central bank's decision to keep its yield curve control policy unchanged and vowed to conduct unlimited bond buying to maintain the bank’s yield curve control. 

BOJ Core CPI rose to 3.1% year-on-year, exceeding expectations of a 2.9% print. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. National Core CPI for December was at 4.0%, rising above November’s 3.7% print. In addition, wages in Japan increased for the first time in nine months by 4.8% year-on-year in December. Increased price pressures and wages raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% on an annual basis and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Annual PPI and Preliminary Machine Tool Orders are scheduled to be released on Friday for Japan and may affect Yen price somewhat, although USD/JPY is expected to depend primarily on the dollar this week.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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