Trading Currencies: Euro and the Pound Moved Higher

ECB’s Hawkish Shift and BoE’s Tightening Stance

Last week, the European Central Bank (ECB) had decided to keep its key interest rates unchanged despite rising inflation. The announcement meets market expectations. The central bank projected higher inflation will cease eventually later this year. That said, President Lagarde adopted a more hawkish tone than before as she no longer cited an interest rate hike in 2022 as very unlikely.

“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher,” Lagarde said.

Elsewhere, the Bank of England (BoE) raised its key interest rate from 0.25% to 0.5% in an effort to contain inflation. If we look at the data more closely, we will find out that four of the nine policy makers voted for a bigger hike to 0.75%. That said, BoE Governor Bailey reassured that the BoE is not planning for a long series of rate hikes.

Long-awaited NFP Surprises

Many investors predicted a bleak outlook towards US January nonfarm payrolls results due to the rapid rise of the Omicron variant. A White House official even warned that the result could look “strange”.

The actual figure turns out to be strange indeed but in a positive manner. The US economy added 467K jobs in January, tripling the Wall Street estimate of 150K added jobs. The leisure and hospitality sector led the gains, followed by professional and business services and retail sectors. The jobless rate rose to 4% and the labor force participate rate increased to 62%, suggesting a sign of recovery in the private sector.

Not only that, the Labor Department revised November and December 2021’s results much higher. December surged from the initially reported 199K to 510K jobs, while November increased from 249K to 647K jobs.

These data suggest that the US job market is stronger than expected in the face of the ricocheting pandemic, or the country seems to have digested the caution about the Omicron variant. While the Fed has already fixed its eyes on interest rate hike, an upbeat job report definitely does more good than harm.

Market Reaction

The Euro strengthened on Lagarde’s hawkish remark. EUR/USD rose 133 pips to 1.1438 last Friday, and the pair had remained above 1.1400 so far. The pound also rose on the BoE interest rate decision. GBP/USD increased 23 pips to 1.3600 but later slid on the NPF announcement. As for US Dollar, it strengthened from two-week lows on Friday’s NPF announcement. Receive latest price updates on the popular FX pairs

Upcoming Events to Watch:

• January Consumer Price Index
• February Michigan Consumer Sentiment Index (preliminary)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.