As the dangers of more entrenched inflation and negative consequences on GDP become more obvious, monetary policy risks enter new terrain, and rate rises alone are no longer sufficient to protect currencies. The Bank of England (BoE) hiked interest rates for the third time in a row yesterday, but warned of stagflationary concerns, noting “material negative implications of increasing commodity prices on real family incomes and activity.”
In terms of policy direction, the Bank of England promised more mild monetary tightening but acknowledged that there are risks on both sides of that choice, depending on how medium-term inflation forecasts evolve. The British pound (GBP) declined somewhat against the dollar in response to the Bank of England’s announcement, but dramatically against commodity-linked currencies such as the Australian dollar (AUD) and the Canadian dollar (CAD) (CAD).
After European Central Bank (ECB) president Christine Lagarde’s speech in which she stated that “Europeans would, in the short term, be confronted with greater inflation and weaker economic development,” the euro (EUR) reversed direction yesterday, falling below 1.11 dollars. Oil prices rebounded to above $100 per barrel, propelling the USD/CAD pair to March lows and the AUD/USD pair to near-month highs.
On the geopolitical front, Ukrainian President Volodymyr Zelensky expressed gratitude to the US and French presidents for their help to Ukraine. Meanwhile, top Russian and Iranian officials met in Moscow to discuss ways for the two nations to collaborate in the energy industry, according to Interfax. At 13:00 UTC, US President Joe Biden will meet with Chinese President Xi Jinping for their first face-to-face encounter since the Ukraine/Russia conflict started.