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Daily Wrap Up 05 May 2022

5 May 2022 04:45 PM

Sterling slumps on BoE warning, Wall Street tumbles  

The Bank of England amplified recession fears by forecasting the British economy will contract by 0.25% next year, while at the same time, hiking interest rates by 0.25% to 1% - the highest level since 2009. Six of the nine monetary policy committee members voted in favour of the hike, in fact three backed a lift of 0.5%. This suggests that some policymakers are very keen to tackle the high inflation, but that could put pressure on demand, hence why the BoE warned about a potential economic contraction next year. For too long, the BoE kept interest rates at rock-bottom levels to support the economy, but now that inflation is aggressively moving higher, and the bank is scrabbling to hike rates in order to try and keep a lid on costs. Sterling is suffering across the board as the prediction about negative growth sent a shock through the currency.

Yesterday evening, the Federal Reserve lifted rates by 0.5%, in line with forecasts but the overall message was not as hawkish as expected. From June, the Fed will start to reduce its balance sheet by $47.5 billion per month, while on the run up to the meeting, analysts were anticipating a reduction of $95 billion, so in that regard it was measured. It has been a volatile 21 hours for equities, as US stocks enjoyed a massive rally last night, but they have given up most of those gains today. European equity markets were firmly in positive territory this morning, but the aggressive move lower in the US is hurting stocks on this side of the Atlantic. It seems that fears about lower growth in the US are still in circulation despite the Fed not acting excessively hawkish.

It has also been a choppy period for the US dollar, as the greenback sold-off sharply last night in the wake of the Fed’s announcement but due to the slump in sterling, the dollar is up 0.9%. GBP/USD has fallen to a fresh 23-monht low. Last week, the US dollar index hit a five-year high and now it is not too far from retesting those levels thanks to the bearish forecast from the BoE. Gold and silver have been in high demand in the last two sessions. The metals received a boost from the Fed’s announcement and the tumble in US stocks has increased their attractiveness today.

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