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Central bankers expect more tightening, but no recessions

Sterling loses ground after dovish BoE Governor Bailey comments..



The USD was the clear winner yesterday after hawkish comments from Fed Chair Powell. "Policy hasn't been restrictive enough for long enough" is a clear indication that the markets' expectation of possibly two more interest rate hikes before the current cycle is done is correct. 

The Dollar advanced 1% versus the Pound and 0.5% against the Euro yesterday. The £-€ rate dropped initially by 0.5% after dovish comments by BoE Governor Bailey. He started by defending the banks decision on raising by 50bp and not 25bp as many had expected last week.

But apart from suggesting the bank will 'do what is necessary' and is 'evidence-driven', his comment "the market has got a number of further increases priced in for us. My response to that would be, well, we'll see".This wasn't received well by traders, especially as the other panelists answered with more certainty. 

ECB President Lagarde cemented expectations for a ninth-consecutive rise in Euro rates next month by saying "we still have more ground to cover" and "we are not seeing enough tangible evidence that underlying inflation is stabilising and moving down'. 

All expressed that their economies may flat-line for a while due to inflationary conditions, but stressed an outright recession is not expected. The BoE & ECB confirmed their concerns of wage-price spirals and that European interest rates will stay higher for longer compared to the US.