USD stumbles lower

Daily Currency Update

The main talking point in financial markets in the past week or so has clearly been the quite sharp repricing in interest rate expectations. Not only did both the headline and underlying inflation rates come in comfortably below consensus, but the downward trend in price pressures is clearly picking up pace, with the former of the two indicators now only just above the European Central Banks 2% target (2.4%). With inflation slowing and a technical recession in the bloc likely in the final quarter of the year, the ECB could change their policy stance at upcoming meetings, with investors now almost fully pricing in a first-rate reduction in March, and a total of 145 basis points of cuts through the end of next year.

While this pricing appears excessive, it is looking more likely that the ECB will ease policy first among its G10 peers. Indeed, rhetoric from Governing Council officials have turned in recent days, with members Villeroy and Schnabel both appearing open to cuts at some stage in 2024 during their recent remarks. This may be evidence of early signs of a pivot from the ECB, as it gradually tweaks its guidance and communications in anticipation of a policy reversal in the first half of next year.