Bank of England, Hiking Cycle: Is the End in Sight?

Following the decicion of the Bank of England to raise the Bank Rate to 4.50%, market participants are seeking further guidance on the future path of interest rates. However, it is believed that the Bank of England’s hiking cycle may be coming to an end, as it maintains a data-dependent stance and upgrades its projections.

Chief Economist Huw Pill’s comments indicated that UK inflation is reaching a turning point and is expected to slow rapidly. Despite the relatively dovish stance of the Bank of England, market pricing still suggests expectations of one and a half more rate hikes by the Monetary Policy Committee (MPC). The release of labor market data is expected to be a significant event for the pound, with signs of weakness potentially leading to a sell-off.

Euro’s Downside Break: Awaiting Confirmation for Hawkish Stance

The euro experienced a downside break against the dollar last week, despite consistently hawkish commentary from ECB members. Traders are waiting for data to confirm the calls for a more hawkish stance. With minimal scheduled data in the eurozone this week, the focus is likely to remain on developments in the United States, particularly regarding debt ceiling discussions.

US Dollar Index Surge: Haven Flows and Debt Ceiling Discussions Impacting USD Price Action

The US dollar index (DXY) saw a 1.4% surge over the past week, driven by haven flows due to concerns over the US banking system and potential government default. Additionally, an increase in medium-term inflation expectations lifted Treasury yields. However, at the start of the week, the dollar is trading on the back foot, possibly due to profit-taking.

The Australian and New Zealand dollars are benefiting from positive factors, including Chinese inventory data suggesting increased production and greater liquidity injections from the People’s Bank of China. Discussions on the US debt ceiling are expected to impact USD price action throughout the week, with the Treasury having limited leeway to meet its spending commitments. Progress in resolving the impasse could weaken the dollar, while haven flows and rising Treasury bill yields may continue to support it. The focus of today’s economic calendar will be on the Fed’s implied interest rate path, with several speakers scheduled to provide insights.