ECB Minutes suggest a concerned shift toward wage inflation in 2024
Daily Currency Update
The Pound remained firm vs the US Dollar and Euro on Thursday on the foot of higher-than-expected inflation data released this week. Markets reacted to economic data which confirmed inflation expectations are remaining persistently high indicating interest rates may not fall as soon as markets expect lending support to the Pound.In Europe, markets have begun to realize that interest rates may not fall quite as fast as anticipated. ECB officials have made it clear that rate-cut expectations have moved far beyond what the council may be willing to consider. Notwithstanding this, the Euro has managed to remain relatively subdued as markets await further economic data.
US markets and the Dollar have been buoyed by strong housing and labour data. Tensions in the Middle East and the weakening of the Chinese stock market are driving ongoing demand for the Dollar. Markets still expect a 50% chance of interest rate cuts in the US in March and April but as most Central Banks iterate – rate cuts will be data-dependent.
Key Movers
In the UK retail sales data is due today. This will be watched as the Pound grapples with a mix of strong inflation and weakening growth. Markets have priced in significant rate cuts through 2024 as this view unwinds there could be room for the Pound to rally vs the Euro and Dollar.The ECB continues to warn against complacency as they endeavour to bring inflation down to their 2% target before 2026. Interestingly, one of their chief concerns is unions lobbying for increased wages in 2024. This is on the foot of a decline in real wages through 2022 and 2023. This will likely put pressure on the Euro.
The US Dollar has remained firm through this week as markets pare back bets on how much the Federal Reserve will slash borrowing costs in 2024. The timing and amount of rate cuts have also diminished sharply this week. This is likely going to keep the Dollar firm vs its G7 counterparts.
Expected Ranges
- GBP/USD: 1.2625 - 1.2725 ▼
- GBP/EUR: 1.1620 - 1.1720 ▼
- GBP/AUD: 1.9200 - 1.9300 ▼
- EUR/USD: 1.0830 - 1.0930 ▼