Markets continue to adjust to hawkish shift from central banks

The British pound/U.S. dollar (GBP/USD) currency pair breaks 1.30 and nears nine-month high; spike in European yields may be adding equities to slip in recent days; Plenty of data today as central bankers take a day off.

Friday is shaping up to be much like the days that preceded it, with equities set for another negative start and sterling building on recent gains as yields continue to climb in response to this week’s central bank commentary.

Sterling has got off to another positive start on Friday as it takes another run at 1.30 against the dollar. Once again the pair has breached the level but has so far failed to break above the highs set in the middle of May of 1.3048, a break of which would see it trade at its highest level in nine months.

Rising yields in the UK and European bonds are driving the moves in sterling and the euro – both of which are up more than 2% on the dollar this week – with the slew of commentary from prominent central bankers being deemed much more hawkish than anticipated. The quite deliberate shift, particularly from the Bank of England, is a significant shift from policy makers with previous comments being broadly neutral or erring on the dovish side. The inflation scenario in the UK is clearly spooking policy makers at the BoE – as seen by this month’s vote – far more so than it was investors who were largely shrugging it off.

The sharp moves in bond markets may also be aiding the declines in equity markets in recent days, while futures are indicating that we’re facing another day in the red with small losses seen at the open. It’s also worth noting that today is quarter-end which may have some impact on how equities trade throughout the session.

We may not be flush with central bankers today, as has been the case for much of the week so far, but there will be a constant stream of data released throughout the day which should keep things interesting. Flash CPI data from the eurozone is the most noteworthy this morning, coming as the ECB contemplates trimming the monthly bond purchases again. We’ll also get the final release of first quarter UK GDP, which is expected to remain unchanged at 2%. This will be followed this afternoon by a number of releases from the U.S. including inflation, income and spending figures.

About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site,