BoE and EBC meetings in focus

Traders halted the dollar's slide on Thursday, and stocks are set to open muted as investors are waiting for central bank meetings in Britain and Europe after mixed earnings and looming job data in the US.

US dollar fell to the one-week low last night after data showed a drop in US private sector employment in January, as soaring COVID-19 infections disrupted business operations, raising the risk of a sharp reduction in employment.

Coming PMI figures

UK and EU PMIs in January will kick in later Thursday ahead of the BoE and ECB policy meeting. The coming figures will be widely expected to be similar to those of the previous month with a level above 50.

The BoE interest rate decision

After inflation soared to its highest level in nearly 30 years, the Bank of England looks set to raise interest rates for the second time in less than two months at its upcoming monetary policy review on Thursday, reversing more of its COVID-19 pandemic stimulus. That would mark the first time since 2004 that interest rates have been raised back-to-back. Yesterday, the UK Manufacturing PMI came in at 57.3 versus an expected 56.9, which boosted the pound, while it seems to have already priced in a rate hike of 0.5% from 0.25%.

The Fed's expected tightening of monetary policy at a faster pace may hold back the GBP from seeing significant gains. However, the divergence between ECB and BoE can shake EUR/GBP. Markets have already priced in a rate hike by the Fed in March, with speculation growing that it might be 0.5% to contain inflation and another 4 rate hikes by the end of 2022. Sterling could also gain some upside towards the end of the week if the BoE leaves open the possibility of an aggressive tightening cycle in 2022 while not explicitly committing to one.

ECB policy meeting

Markets expect the ECB to turn hawkish in the eurozone after an annualized inflation of 5.1% in January, up more than twice the ECB's 2% target, defying expectations for a substantial drop. Consequently, the ECB is left with no choice but to admit that price growth is not as temporary and unproblematic as it has long predicted. Even though the ECB is not expected to change its policy, recent robust labour data and hot consumer prices have raised expectations of a shift away from describing inflation as transitory.