A flurry of central bank activity ensues to counter recent hot inflation reads. Bank of England and Norges Bank deliver non-consensus 50bps hikes

By Stuart Talman, XE currency strategist

Heading into the Northern Hemisphere summer, the weather is not the only thing heating up. Developed nations' central banks are bringing the heat as persistently high price pressures threaten to entrench inflation across Western economies. 

A flurry of aggressive monetary tightening has been the major storyline for this week, the Bank of England and Norway's Norges Bank delivering non-consensus 50bps hikes whilst the Swiss National Bank delivered a widely expected quarter-point lift, signalling that more hikes are required.

Despite the rising global yield backdrop, which has driven the yield on the Fed-sensitive 2-year US government bond to its highest level since the collapse of Silicon Valley Bank in March, the Nasdaq and S&P500 remain near 52-week highs, although the bulls are on the back foot following three days of controlled selling.

Amongst the G10 cohort, the Norwegian Krone is the solitary major currency yielding a material gain versus the dollar, rising around a third-of-a-percent as the Norges bank lifted the main policy rate from 3.25% to 3.50%.

Falling to 5.9% in February, core CPI in Norway rose to 6.7% in May.

The Krone aside, the dollar has delivered broad-based gains against its major peers. Failing to maintain a foothold above 62 US cents, the New Zealand dollar sits in the bottom third of the G10 leaderboard, shedding over a third-of-a-percent.

The Australian dollar and Japanese yen are the two laggards, the former struggling against a backdrop of a notably weak commodity complex whilst the JPY underperforms as global yields continue to firm.

Whilst the Kiwi has logged higher intraday highs and lows over the past three trading days, NZDUSD upside has faltered at the 100-day moving average and trendline resistance that extends down from the 11 May and 16 June highs. Falling from the 0.6220's through 0.6280, Thursday's softness could portend a test of key support near 0.6150 before the week is done.

Having failed an important test of the 100-day MA, attention now turns to the 200-day moving average located near 0.6147, the 38.2% Fibonacci retracement of the May-June rebound.

A decisive break below hands momentum back to the NZD bears.

The major news story for markets through Thursday has been the Bank of England's surprise 50bps hike. The key takeaways:

• BoE hikes by 50bps to 5.00%
• Vote was 7-2 (2 voting for 25bps)
• Refrains from providing forward guidance

Following on from Wednesday's hot UK CPI data, reporting that core inflation climbed to a fresh 31 year high at 7.1% (the highest amongst the G10), odds of a 50bps hike firmed, although market pricing assigned a 60/40 split in favour of a quarter-point move.

Core services inflation in addition to a resiliently tight labour market has been problematic for the BoE, increasing the risk of secular inflation, heightening stagflation concerns.

Whilst the BoE offered no forward guidance, Thursday's double up implies 25bps rate hikes are likely to follow at the August and September monetary policy meetings, lifting the benchmark lending rate to 5.50%.

Futures markets currently price a terminal rate closer to 6%.

Following textbook convention, the GBP immediate reaction was a spike higher. However, recessionary concerns reversed this move, GBP decoupling from the move higher in short-dated UK gilt yields, the view being that the BoE's renewed aggression is likely to tip the British economy into a pronounced downturn.

Against the pound the Kiwi starts the final local session of the week near 0.4850, having traded a post BoE high near 0.4875. Wednesday's low a pip or so above 0.4820 marked a fresh 3+ year low.

We expect that market pricing, and the BoE will converge in the weeks ahead, aligning to project a lighter amount of tightening than the 100bps currently priced in via UK rates markets. Should this prove correct and risk sentiment is not overtly negative, look for NZDGBP to improve back to the midpoint of the May-June sell-off, near 0.4950.

Casting our gaze over the final day of the week, preliminary (S&P Global) PMIs are released for AUS, the UK, EU and US.

A multitude of central bank officials are speaking, FOMC members likely to echo the message from Powell's 2-day testimony - expect more hikes.

We're baking on hawkish Fed-speak further weighing on risk sentiment as we head into the weekly close, pushing NZDUSD through 0.6750 support.

Stuart Talman is Director of Sales at XE. You can contact him here.