Daily Brief

The end of negative rates?

End of Q3 looks likely

ECB president, Christine Lagarde, signalled publicly for the first time that the ECB are ready to end their 8-year ‘dip’ into negative interest rates, suggesting that Euro-area borrowing costs are likely to reach the giddy heights of zero by the end of Q3. The ECB president said in a Blog that ‘based on the current outlook’, the ECB was ‘likely to be in a position to exit negative interest rates by the end of the third quarter’, given that headline inflation has hit 7.5% for the region.

A boost for the EUR

Given that the ECB’s current deposit rate sits at -0.5%, two 25bps rate hikes should happen on this basis, most probably in July and September. Interestingly enough, there were widespread (but unconfirmed) reports that the more hawkish members amongst the ECB were left somewhat frustrated by Lagarde’s timeline for rate hikes, rumours which do not sound entirely preposterous given those bullish comments from the ECB’s Knot just last week. The news may have helped support the surge in EUR/USD yesterday, with the pair moving as high as 1.0700, which represents a near 1 month top for the single currency, and a hugely impressive rally of over 100 pips on the day. GBP/EUR also dropped to the bottom of the recent 1.1770 – 1.1860 range, fuelled by that strong single currency.

BoE to continue hiking?

BoE governor, Andrew Bailey, indicated (during a speech yesterday) that the BoE are prepared to raise UK interest rates further, in an attempt to combat surging inflation, which as we found out last week, has now reached 9% (YoY). Bailey went on to admit that the UK is facing a very big negative impact on real incomes, caused by the rise in the price of imports. He also hit back at those who blamed the BoE and the government’s response to COVID-19, for letting demand to get out of control and stoking inflation further. Notwithstanding those comments, any further rate hikes could pile more pressure on the UK consumer, who is already facing an unprecedented increase to their cost-of-living.

A pound for the dollar

GBP/USD took its cues away from Bailey and was driven higher from a most welcome risk-on start to the week for markets (for once), which heaped further pressure on the broader greenback. GBP/USD moved as high as 1.2600 at one point, with the dollar index (DXY) slipping to a monthly low, at just under 102.00. That weaker dollar narrative was reflected across the board, with USD/CAD giving-up support at 1.2800 and both AUD/USD and NZD/USD marking strong gains through the day. The latest U.S New Home Sales, PMI and Powell (all today) could help to dictate whether this dollar decline has more longevity, especially if there is a continuation to the recent decline for the U.S housing market.

50bps from the RBNZ?

The latest RBNZ meeting is expected to conclude with another 50bps rate hike overnight, given the surging inflation in New Zealand. Beyond this month, however, things may become somewhat more complicated, as the RBNZ could move back to 25bps rate hikes from herein as they assess the impact of the previous larger hikes to the Kiwi economy. Ahead of the RBNZ and talking of the economy, the latest New Zealand Retail Sales (QoQ/Q1) were released overnight, with a -0.5% decline during the 1st quarter of this year, down from 8.3% previously. This news has helped to offer a consolidative tone to NZD/USD, after topping out at around 0.6500 yesterday.

What else is happening today?

Both the Fed’s Powell and ECB’s Lagarde have planned speeches today. The latest Euro-area, UK & U.S PMI readings are out, and will be keenly monitored too. We also need to watch for comments emanating from the World economic Forum in Davos this week.

 

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