Trading was flat yesterday as markets positioned themselves ahead of the Fed meeting in the evening. GBP moves were also muted and directionless following the inflation numbers, as markets waited for today’s BoE meeting.
The Fed were deemed to have been dovish last night, electing to stick to their forecast of three 25bps worth of rate cuts this year, even if inflation or growth comes in stronger. Fed Powell dismissed the recent rise in CPI and PPI numbers. Powell was bullish on the economy, raising GDP forecasts for this year and stated there will be fewer rate cuts in 2025 – suggesting that interest rates will settle higher over the long term. The overall message was dovish with a rate cut in June firming up, thus USD weakened.
*Daily move - against G10 rates at 7:30am, 21.03.24
** Indicative rates - interbank rates at 7:30am, 21.03.24
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PMI numbers today will give a clearer picture for economic activity for the first quarter of the year. Activity in the UK and Europe has been steadily improving since the final months of the year, and should this continue then it will add fuel to the argument that both economies are bouncing back from a poor second half of last year.
Sandwiched between UK/EU and US PMIs we have the BoE meeting. So, no change expected on interest rates but the voting will give us a good barometer of which end of the dovish-hawkish spectrum the Bank sits on. The BoE is still seen to be cutting rates later than the ECB and Fed, which has kept GBP buoyant vs the EUR and USD for most of this year. A dovish turn from the BoE will likely put selling pressure on GBP as the rate cut timing will fall more in line with the ECB and Fed. If they are not perceived dovish then we could see a test towards the 2024 highs on GBPUSD.
As we know inflation in the UK has been declining more quickly than what's been expected so in theory this would bring forward when rates are cut by the BoE. But services CPI has not been falling quick enough, and this could put the BoE off from changing their stance, and keep the probability of a first rate cut in August.
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