The euro and the pound rose

The ECB’s hawkish turn and the BoE’s tightening policy

Last week, the European Central Bank (ECB) decided to keep its key rates unchanged despite the rise in inflation. The announcement meets market expectations. The central bank has predicted that higher inflation will finally cease later this year. That said, President Lagarde has adopted a more hawkish tone than before by no longer citing a 2022 interest rate hike as highly unlikely.

“Compared to our December expectations, the risks to the inflation outlook are on the upside, particularly in the near term. If price pressures result in higher-than-expected wage increases or if the economy returns to full capacity more quickly, inflation could turn out to be higher,” Lagarde said.

Elsewhere, the Bank of England (BoE) raised its key rate from 0.25% to 0.5% in an effort to contain inflation. If we take a closer look at the data, we will find that four of the nine policymakers voted for a bigger hike to 0.75%. That said, BoE Governor Bailey assured that the BoE does not foresee a long series of rate hikes.

Long-awaited NFP surprises

Many investors predicted a bleak outlook for U.S. January Nonfarm Payrolls results due to the rapid rise of the Omicron variant. A White House official even warned that the result might look “strange”.

The actual figure indeed turns out to be strange but in a positive way. The US economy added 467,000 jobs in January, tripling Wall Street’s estimate of 150,000 more jobs. The leisure and hospitality sector led the gains, followed by the professional and business services and retail trade sectors. The unemployment rate rose to 4% and the participation rate to 62%, suggesting a sign of recovery in the private sector.

Not only that, the Labor Department revised the November and December 2021 results upward. December fell from the initially reported 199,000 to 510,000 jobs, while November fell from 249,000 to 647,000 jobs.

These data suggest that the US labor market is stronger than expected in the face of the ricocheting pandemic, or the country seems to have digested the caution regarding the Omicron variant. While the Fed has already set its sights on rising interest rates, an upbeat jobs report certainly 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 has remained above 1.1400 so far. The pound also rose following the BoE’s interest rate decision. GBP/USD rose 23 pips to 1.3600 but then slipped on the NPF announcement. As for the US Dollar, it strengthened from its two-week lows on Friday’s MFN announcement. Get the latest price updates on popular currency pairs

Upcoming events to watch:

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

This article is prepared by Lucia Han of Mitrade and is provided for informational purposes only. We do not represent that the material provided herein is accurate, current or complete. The content of the article does not take into account your personal investment objectives or financial situation and should therefore not be considered as such. You should seek your own advice.

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