All eyes on the Bank of England’s interest rate decision
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Fresh Guidance on BoE Rate Cuts Could Move the Pound
EUR/GBP recovered on Thursday despite comments by Bank of England’s Swati Dhingra, who said on Wednesday that delaying interest rate cuts could increase living costs and slow down economic growth. BoE Governor Andrew Bailey addressed the United Kingdom Parliament on Tuesday, noting the rapid decline in inflation in the UK and the bank’s willingness to cut rates before inflation reaches below the 2% target. BoE Deputy Governor Ben Broadbent noted that wage growth and services inflation remained above the rate, which indicate alignment with sustainable inflation at 2%.
The euro was under pressure as market was cautious following diminished expectations for early interest rate cuts globally. The seasonal and non-seasonal adjusted ECB Current Account was stronger in December compared to the previous month. Additionally, ECB Negotiated Wage Rates (QoQ) rose in the fourth quarter of 2023. ECB President Christine Lagarde has recently highlighted how wages remain an “important driver of inflation dynamics in the coming quarters.”
In terms of economic data, we note the following: On Monday, we get CBI distributive trades for February from the UK. On Tuesday, investors will turn their attention to Germany’s consumer confidence for March. On Wednesday we note the release of the Eurozone’s economic sentiment for February. On Thursday, we highlight GDP rates from France and preliminary HICP rates for February from France and Germany. On Friday, we get the release of the Eurozone’s preliminary HICP rates for February.
Expected Volatility – Medium
Investors will closely monitor any fresh commentary by BoE policymakers on rates cuts, and if they signal that they are nearing an easing in monetary policy, then the pound could weaken. For the euro, February’s preliminary HICP rate will be crucial. If the rate drops, market worries about inflation may ease, but this could weigh on the euro. A small increase may surprise markets and strengthen the euro, but it could boost concerns about an extension of tight monetary policy by the ECB.
All eyes on the release of the revised US GDP rate for Q4
The US Initial Jobless Claims for the week ending 17 February dropped to 201K from the previous week’s 213K. Continuing Claims also fell to 1.862M, below expectations and the prior week. The report indicated that the US labour market remains strong which could allow the Federal Reserve (Fed) to delay cutting interest rates. Expectations for the first rate cut from the Fed in May have now been reduced and postponed till June due to the robust job market and hotter-than-expected inflation numbers in January.
On Thursday, the US Manufacturing PMI improved to 51.5 in February from 50.7 in the previous reading, higher than the forecast of 50.5, and the best reading in 16 months. On the other hand, the Services PMI eased to 51.3 in February from 52.5 in January, lower than the 52.00 expected.
In the UK, preliminary Manufacturing PMI for February came in at 47.1 versus 47.0, but less than market expectations of 47.5. The Services PMI remained the same at 54.3 but above the consensus of 54.1. Composite PMI came in at 53.3, better than expectations and the previous reading of 52.9.
In terms of US economic data, we note the following: On Tuesday, we note US durable goods, while on Wednesday we highlight GDP rate for Q4 and retail sales. On Thursday, we note the release of consumption rate and Core Price Index for January. On Friday, we get ISM Manufacturing PMI figure and final University of Michigan consumer sentiment for February.
Expected Volatility – Medium
The US Gross Domestic Product Annualized (GDP) for the fourth quarter will draw attention. If the rate accelerates, the dollar will find support.
Preliminary HICP rates to move the euro
The EUR/USD pair remained strong as the US dollar weakened despite market expectations of continued higher interest rates by the Fed. The Federal Open Market Committee (FOMC) Minutes revealed that policymakers are concerned about early interest rate cuts, indicating that policy easing will not start any time soon.
The Eurozone and German Purchasing Managers Index (PMI) data came in mixed for February. The preliminary Eurozone and German Services PMIs came in better than expected but Manufacturing PMIs were weaker than market forecasts.
The FOMC Meeting Minutes for January highlighted the importance of further evidence of disinflation to alleviate concerns of inflation rising again, especially after the release of hot figures from the Consumer Price Index (CPI) and Producer Price Index (PPI) from January, and strong employment data from February.
Expected Volatility – Medium
Wednesday’s revised USD GDP rate for Q4 and retail sales will move the dollar.
Japanese Yen (JPY)
The growth rate of machinery orders in December increased, but concerns about the Japanese economy continue. The trade deficit has widened, while the contraction in the manufacturing sector in February has further weakened the outlook. Looking ahead, the release of January’s headline and core Consumer Price Index (CPI) rates on Tuesday may show an easing in inflationary pressures, which could weaken the JPY. The BoJ is expected to raise interest rates for the first time in decades in April, with further hikes expected later in the year. However, this doesn’t seem to be supporting the JPY currently. Apart from Tuesday’s CPI rates for January, we note the release of the preliminary industrial output for January due out on Thursday.
Australian Dollar (AUD)
The Australian dollar has remained strong against the USD for three weeks in a row. Looking ahead, the release of China’s manufacturing PMI figures for February could influence the AUD, especially if they indicate continued problems in Chinese factories. The Reserve Bank of Australia (RBA) considered the possibility of a 25 basis point rate hike in its February meeting minutes, suggesting potential future support for the AUD. If there is an increase in the wage prices index for Q4 and upcoming CPI rates for January, due out on Wednesday, then inflationary pressures could rise. This in turn may encourage a more hawkish stance from the RBA and further support the AUD. Similarly, a potential acceleration in retail sales growth for January, due out on Thursday, may indicate strong consumption, and add to inflationary pressures, further supporting the AUD.
Canadian Dollar (CAD)
The Canadian dollar is sensitive to market sentiment as a commodity currency, and last week’s improved sentiment may have provided some support. However, stable oil prices didn’t manage to support the CAD, and if worries about a tight oil supply increase, then the CAD may find support.
Market expectations suggest the Bank of Canada (BoC) may begin cutting interest rates in June, with three cuts expected throughout the year.
On a macroeconomic level, CPI rates slowed in January but remained within the bank’s inflation target. This slowdown may increase expectations for an earlier rate cut, further pressuring the CAD. Attention will turn to GDP figures for Q4 and a potential contraction could weaken the CAD. On Thursday, we note Canada’s business barometer for February, and, on Friday, Canada’s S&P manufacturing PMI figure also for February.