NZD consolidates recovery as markets eye ECB and Bank of England updates

Key Movers

The US dollar continued to track lower through trade on Wednesday as domestic labour market data coupled with bond market repricing helped foster demand for risk assets and other major currencies. ADP employment estimates showed a sharp contraction in jobs growth through January with 301,000 jobs lost, a significant downturn and shift away from recent labour market strength. The downturn in labour market performance has been blamed on the surge in COVID-19 case numbers thanks to the Omicron variant, dispelling expectations for a 50-basis point rate hike in March and prompting a correction in 10-year bond rates. In contrast, European bond markets responded to an uptick in headline CPI data pushing 10-year rates toward a two and a half year high. European inflation rose to 5.1% year-on-year, its highest level in twenty-two years and well above market estimates. The record print has prompted markets to bring forward expectations for an ECB rate hike with analysts now pricing in a 10-basis point adjustment in July with tonight’s ECB policy meeting now in sharp focus. We expect policymakers will maintain their stance inflation will moderate and are unlikely to be drawn on raising rates in 2022. That said, we are keenly attuned to even the slightest change in rhetoric as the euro looks to consolidate a push back above 1.13.

The Bank of England is expected to raise rates by 25 basis points this evening while a process of balance sheet correction is likely to be announced. Policymakers have signalled QE tightening would commence once the interest rate reached 0.5%. With the market pricing in a 125-basis point adjustment in rates across the rest of the year, we are keenly attuned to any policy change and forward guidance afforded today.