Summary:

• BoE keeps interest rates unchanged, a bit dovish statement accompanying the decision weakens GBP 
•  Flash PMIs confirm ongoing recovery in the European economy
•  NOK leads gains in G10 basket as Norges Bank takes more hawkish stance

This morning was full of important market events, including BoE interest rate decision and data from the UK and European economies. However, other central banks also held their meetings today (SNB, CBRT, and Norges Bank) and we are still ahead of ECB decision and President Draghi press conference. NOK has been the strongest currency in the G10 basket as Norges Bank has taken a bit more hawkish stance. Moreover, the stellar PMIs from euro area didn’t improve sentiment in European stock markets.

Bank of England kept the interest rates unchanged in line with expectations. Each of MPC member was in favour of this decision and the statement didn’t deliver anything new for investors. BoE stays cautious as it has to also take into the consideration political developments. Moreover, the bank underscored that any rate hike will be limited and gradual. BoE also pointed out that economic indicators for the Q4 quarter have been somewhat softer than expected. Thus, despite rising inflation, the bank is not ready to tighten in upcoming months. In turn, GBP has slightly weakened. Note also that improvement in the retail sales data could be just temporary. 

Based on December PMIs coming from the major European economies one may say that the economic improvement keeps going and there are no signs suggesting that the trend could lose its steam in the foreseeable future. The single currency has been little changed though as there could be more caution among traders owing the looming ECB decision (12:45 pm BST). Moreover, the stellar PMIs didn’t help European stocks. 

Taking a closer look at the statement of the Norges Bank one may notice that a jump seen in the Norwegian krone seems to be entirely justified. Although the bank did not change rates as it was broadly forecast it chose to lift the projected path of interest rate hikes along the curve. Hence now the monetary authorities expect the main rate to be at 0.62% in Q4 2018 (vs. 0.58% previously) and at 0.74% in Q1 2019 (0.62% earlier) foreshadowing that rates could increase gradually after autumn 2018. In turn, NOK has advanced over 0.8% against USD and EUR. 

The second best currency in G10 basket has bee AUD. The Australian dollar has gained a boost from the release of the stunning labour market report outpacing forecasts in terms of an employment change. Employment grew as much as 61.6k in the past month while the consensus had pointed just to 19k. Furthermore, the prime contributor to this growth came from full-time employment which increased 41.9k well more than expected.

The Chinese central bank unexpectedly chose to inject some liquidity via MLF operations (288 billion yuan in 1Y-transactions). The PBoC raised also rates: MLF by 5 basis points to 3.25% and 7-day reverse repo by 5 basis points as well to 2.5%. The bank said in its statement that an injection was aimed at meeting seasonal liquidity demand at financial institutions. In turn rate hikes were a natural response to another hike delivered by the US central bank on Wednesday. 

Thursday’s calendar is really busy. The Fed’s hike yesterday kicked off the rate decision marathon.  We are still before ECB meeting and President Draghi press conference. Moreover, there is a string of data from the US on the agenda – we will get the retail sales and flash PMIs.