Pound lacklustre after a ‘dovish hike’ from the BOE

After sizeable gains at the start of the week, European stocks are faltering, except for the FTSE, which is finding support from surging oil prices. 

• BoJ continues with huge stimulus and warns over the impact of the Ukraine crisis
• Oil extends gains after the biggest daily gain in 2 years
• Peace talks appear to stall, Biden is set to speak with China’s Xi Jinping

European bourses are heading for a mixed start after what was also a mixed session on Thursday. While the DAX and the CAC closed lower, the FTSE rallied 1.3%, boosted by resource stocks and a more dovish sounding BoE.

BOE

As expected, the BoE raised interest rates by 25 basis points in an 8-1 vote, a more dovish vote than last month. Governor Andrew Bailey also adopted a more dovish tone, warning over the effect of rising inflation and slowing growth on oil-importing nations such as the UK. 

BoJ

Overnight it was the turn of the BoJ, one of the most dovish major central banks, and little has changed there. The BoJ left monetary policy unchanged, continuing with its massive stimulus package. Inflation in Japan was 0,9% in January, as the country has avoided the surge in prices, which has impacted many economies across the globe. In line with other central banks, the BoJ warned of the risks to growth from the Ukraine crisis.

USDJPY has resumed its march northwards today, heading back up towards 119.00 and potentially a fresh 6 year high.

CADJPY is on the rise for an eighth straight session and trades at a 7-year high owing to central bank divergence and rallying oil prices.

Oil

Oil prices surged 8% yesterday and are up a further 2%, heading towards the European open as supply fears are back to haunt the market. Yesterday the International Energy Agency warned that around 35% of the Russian oil supply would be shut off from next month, which will be significantly greater than the expected ease in demand which is forecast on the back of higher prices. 

Reports that peace talks are not progressing also add pressure to oil prices, raising fears that Russian sanctions could be further ratcheted up. Even if a truce were agreed between Russia and Ukraine, sanctions wouldn’t be removed immediately but gradually over time. Without a sustained supply, oil prices will likely remain elevated for the foreseeable future.

Rising oil prices are keeping the loonie buoyant. USDCAD is falling for a fourth straight session and trades at a two-week low. Canadian retail sales data is due later and is expected to show a solid rebound in consumer spending after Omicron hit in December. 

Rising oil prices are also helping the FTSE outperform its peers, thanks to the heavily weighted oil majors. The index had extended its rebound from 6760 low at the start of the month but has run into resistance around 7410. A move above here could bring the late February high of 7555 into play.

Looking ahead

Peace talks appear to be on the brink of stalling, and in today’s light economic calendar, investors will be watching developments closely. US President Biden is due to speak with China’s Xi Jinping today, with the Ukraine crisis likely to be high on the priority list. Biden is expected to warn China against supporting Russia.