The value of the British pound fell to its lowest level since November 2020 as the latest data showed that the British economy has slowed sharply.
The UK economy grew at a monthly rate of 0.1 percent in February. This represents a significant drop from January's growth rate of 0.8 percent and a reading below market forecasts of 0.3 percent growth - according to the published data.
UK inflation may break through 8 percent
On the monetary policy front, the Bank of England made its third consecutive interest rate hike in March, bringing borrowing costs down to pre-pandemic levels. However, one policymaker voted to keep rates unchanged, while as recently as January, everyone favored a rate hike, saying further tightening may be appropriate in the coming months.
Members of the Bank of England's council have warned that inflation, which is currently at its highest level in 30 years, could rise to around 8 percent in the second quarter of 2022 and could be even higher in subsequent quarters.
Will the ECB also respond with a rate hike?
The Federal Reserve is likely to raise the federal funds rate by 50 basis points this month as inflation in March could be as high as 8.5 percent, the highest since December 1981. German 10-year bond yields appear to be rising to 0.8 percent, the highest level since February 2018, as markets price in a 70 basis point rate hike by the ECB by the end of this year.
Last week's estimate was for a slightly smaller hike of 65 basis points. The minutes of the March ECB meeting turned out to be more hawkish than expected. Officials signaled plans to end the asset purchase program in Q3, and many advocated immediate policy normalization due to high inflation. The ECB's decision will be announced this Thursday.
Apart from the ECB's decision, the French presidential election results may also affect the euro exchange rate. In the first round, Emmanuel Macron came out ahead of the far-right leader Marine Le Pen, but the second round, which will be held on April 24, will be necessary to decide the outcome.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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