We think that even more significant was the toning down of the language on interest rates in the bank’s statement. In its statement, the BoE noted that further tightening in policy ‘might be appropriate’, a downgrade on its February communications when it stated that it was ‘likely to be appropriate’. The bank revised upwards its near-term assessment of UK inflation. The MPC now expects inflation to reach 8% in the second quarter, and possibly higher later in the year, although this is expected to suppress economic activity during the remainder of the year. The minutes are also much more dovish on long-term inflation than we had anticipated, noting ‘further out, inflation was expected to fall back materially and possibly to a greater extent than had been expected in February.’

Overall, a dovish message that suggests policymakers are growing increasingly concerned about the impact of rising prices on consumer demand, particularly higher commodity prices that are out of the bank’s control. This makes it difficult to see how the BoE raises rates as swiftly as the market is currently pricing in, which presents a bit of downside risk to sterling.

US dollar retreats on Ukraine optimism

Elsewhere in markets, the dollar edged lower against most currencies yesterday, as investors continued to take a cautiously optimistic view on negotiations between Russia and Ukraine. According to the Kremlin, Russia was putting ‘colossal energy’ into discussions, with markets hopeful that a ceasefire is not too far away that would allow a peace deal to be struck. Indeed, optimism levels have been more than enough to reverse any brief gains experienced in the dollar following Wednesday’s FOMC announcement. The Fed raised rates for the first time in the pandemic era, while signalling it expects to hike on a further six occasions during the rest of the year. But, with expectations for Fed tightening already sky-high, the greenback has found gains very difficult to come by in the second half of the week.

Today bodes to be a relatively quiet end to the week in markets, with not a huge amount of major newsflow on the docket. We will continue to be watching developments out of Ukraine very closely, with any signs of a possible breakthrough in talks likely to be perceived as positive for risk sentiment.

To stay up to date with our publications, please choose one of the below:

📩 Click here to receive the latest market updates
👉 Our LinkedIn page for the latest news
✍️ Our Blog page for other FX market reports

🔊 Stay up to date with our podcast FXTalk