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To raise or not to raise rates?

To raise or not to raise rates?

The European Central Bank’s and the Bank of England’s monetary policy statements are the most relevant events in the market today, each of them for different reasons.

The Bank of England could raise interest rates from 0.25% to 0.50%. The BOE governor recognized the need for a more restrictive monetary policy facing inflationary pressure due to the tight labor market.

The pound has strengthened in the last three days largely in anticipation of the Bank of England's decision and because of the dollar’s weakness. GBP/USD has broken above the 100-day SMA and is heading towards the next target level at 1.3700, through which the 200-day SMA passes.

On the other hand, the European Central Bank does not plan any relevant monetary policy changes, according to recent statements by president Lagarde. However, the market's attention will be focused on the president's words during the press conference to see if the recent expectations about future interest rate increases are confirmed in any way.

The eurozone inflation data published yesterday surprised, showing a 5.1% year-on-year result, well above the 4.4% expected, and this has only increased speculation about interest rate hikes this year. Pressures - mainly from Germany - have grown in this direction, and leading market participants are urging president Lagarde to decide if she does not want to see an inflationary spiral in Europe. So, it will be interesting to see how she handles the Q&A session at the press conference.

In principle, if Lagarde sticks to her most recent statements, she should ensure a policy of zero interest rates with no expectations of change in the short term. Any hint or shift in stance could lead to a market turmoil that would negatively affect European indices and push the euro higher.

EUR/USD has continued to rise recently, breaking above the 1.1300 swing zone, largely due to the unexpected emergence of higher rate expectations. But yesterday’s performance was also influenced by the dollar’s weakness, especially after the surprising ADP employment figure revealing a drop of -301k against the 207k expected. Above 1.1300, the next reference levels would be around 1.1355 for the EUR/USD pair.

Sources: Bloomberg, Reuters.

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.

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