A hawkish old lady boosts sterling

GBP

The Bank of England sprang a hawkish surprise on the markets yesterday and, in doing so, increased demand for sterling. The statement following their monthly meeting stated that "some developments" since August have strengthened the case for a "modest tightening" of policy. This led to derivative markets pricing the first interest rate hike, earlier than previously expected, in February 2022.

Another sign of a shift of sentiment in the Monetary Policy Committee came with an increase to two members now looking to end quantitative easing earlier than forecast. Sterling has now joined the dollar as a currency that will benefit from their central bank entering a tightening cycle at the expense of those, such as the euro, who are lagging behind.

EUR

The euro looks likely to stay under pressure until Eurozone inflation reaches a level that forces the European Central Bank to cut back on its pandemic stimulus package. After yesterday's mostly disappointing Purchasing Managers Indexes (PMI), this still looks some way off.

Sunday's German Election will also weigh on the euro today and possibly for some time to come. The polls are predicting no outright winner leaving the heart of Europe facing political uncertainty, possibly for months to come. The IFO's report on the Business Climate in Germany, released as this missive hits your inbox, is today's only meaningful data.

USD

The dollar's performance since Wednesday's Federal Reserve meeting has been somewhat underwhelming in part as the mighty greenback has been overshadowed by the machinations of the Bank of England and, unusually, the rate-hiking Norges Bank. After Monday's selling frenzy of shares on Wall Street led to a souring of risk sentiment, the markets have recovered some poise and demand for safe-haven dollars has abated.

However, Treasury yields rose sharply yesterday, which should underpin dollar demand as we head into the weekend. This afternoon no less than seven speakers from the Federal Reserve are scheduled, including Chairman Jerome Powell, all of whom may expand on their discussions earlier in the week.