Fed and Bank of England both lower interest rates in tandem
Daily Currency Update
Chancellor Olaf Scholz of Germany dismissed Finance Minister Christian Lindner this week, destabilizing his center-left government and ending its three-party ruling coalition. This upheaval in Berlin comes as Donald Trump's election in the U.S. presents new economic and security challenges for Europe. The disruption leaves Europe even more directionless, as France's government is also in a deadlock and Russia continues its steady advance in Ukraine which could pose a broader threat to the continent.Yesterday, the Bank of England cut rates by 25 basis points, a widely expected move. The Monetary Policy Committee noted that Ms. Reeves's recent budget provided "a substantial boost to growth and inflation," reinforcing their gradual approach to rate cuts. As a result, the Pound rose modestly as markets responded to the news.
The Federal Reserve also reduced borrowing costs by 25 basis points, a move anticipated by markets. While acknowledging uncertainties in the economic outlook, the Fed stated that "the economy continues to expand solidly." Inflation remains elevated, particularly in the services sector, but the Fed is confident in achieving its 2% target by 2025.
Key Movers
Economists lowered the ECB’s terminal rate forecast from 2.25% to 1.5%. The rationale for this sharp downgrade is slowing growth in Europe, a political landscape that is worrying at best, and the prospect of hefty tariffs imposed by the Trump administration on companies that export to the US. Uncertainty is high on many levels, which could weigh on the single currency as we move toward year-end.The Governor of the Bank of England, Andrew Bailey, said yesterday that the council needs to monitor the recent budget’s effect on inflation, adding that they will watch very closely what the Trump administration will do on foreign trade. He added that they will seek to work with all US administrations on financial regulation and look forward to cooperation with the Trump administration, emphasizing, “It is critical there is very open dialogue between the UK and US administration.”
Fed Chair Jerome Powell said yesterday that “the law does not permit to demote a Fed Chairperson.” He made this statement following Trump’s threat to remove the autonomy the Fed has in setting monetary policy. He added that if the President-elect asks him to leave, “I will not.” Markets will also be scrutinising any additional mention or action on tariffs, which, if enacted, should lead to increased Dollar buying in the coming weeks.
Expected Ranges
- GBP/USD: 1.2940 - 1.2990 ▲
- GBP/EUR: 1.2005 - 1.2050 ▲
- GBP/AUD: 1.9490 - 1.9535 ▲
- EUR/USD: 1.0750 - 1.0800 ▲