Markets digest heavy data week
Daily Currency Update
The Bank of England (BoE) opened the door to potential interest rate cuts. This move aligns with predictions of inflation returning to the target level by spring, but the central bank remains wary of increasing price pressures.In a close vote of 6-3, the Monetary Policy Committee (MPC) opted to hold rates steady. However, two members favored a hike, and one leaned towards a cut, marking the widest split on policy direction since 2008 and possibly signalling a turning point in the BoE's inflation fight.
Recent pressure from markets and comparisons to the stances of the US Fed and ECB likely influenced the BoE's messaging. Governor Bailey softened his previous claims about the prolonged struggle against inflation.
Markets remain optimistic, predicting at least four rate cuts in 2024, potentially starting in June. However, a May cut still holds a 55% chance.
Despite the change in rhetoric, the pound initially weakened against major currencies, later trading above pre-announcement levels.
Key Movers
Eurozone annual inflation fell to 2.8% in January from 2.9% in December, which aligned with market expectations, the decline being driven by a sizeable -0.4% month-on-month reading. Core inflation fell to 3.3% from 3.4%, but this was a surprise as markets anticipated a fall to 3.2%.The ECB has made much about the need to watch core inflation and wages, and on this basis, policymakers are right to delay any rate cut. Yet, headline inflation below the 2.0% target can't be ignored, creating a communication challenge going forward that could complicate the outlook for financial markets. The market believes the ECB may be on course for an April rate cut, which explains the recent softness in the Euro.
Fed Chair Powell reinforced the idea that a rate cut in March is unlikely despite ongoing market speculation. Nevertheless, he noted rate adjustments remain primarily data-dependent, with upcoming jobs data setting the pace of the US Dollar and expectations for the short term.
Expected Ranges
- GBP/USD: 1.27420 - 1.27674 ▲
- GBP/EUR: 1.17108 - 1.17338 ▲
- GBP/AUD: 1.93169 - 1.93867 ▲
- EUR/USD: 1.08699 - 1.08906 ▲