Investors ramp up expectations for additional Federal Reserve interest rate cuts in the US
Daily Currency Update
After disappointing European regional PMI data and poor German survey results, markets are ramping up expectations for two more interest rate cuts this year, totaling 50 basis points. Inflation and wage data are not softening as much as the European Central Bank (ECB) would like, and as such, markets are currently pricing in just over 40 basis points of cuts before the year-end. The bottom line is that wages and inflation are not yet under control, which implies the ECB will likely adopt a cautious approach when reducing borrowing costs.A lack of significant economic data out of the UK this week has meant that the Pound has been primarily influenced by market sentiment and outlooks for interest rate policy. The Bank of England is anticipated to lower borrowing costs by just 25 basis points before the year-end, as annual services inflation, which is closely monitored by the Monetary Policy Committee (MPC) officials, rose sharply to 5.6% in August from 5.2% in July.
In the US, market expectations are increasing for another 50 basis point cut in interest rates at the Federal Reserve's next meeting. Atlanta Fed President Raphael Bostic stated that "the recent 50 basis point cut last week positions us well should the risk to our mandates be less balanced than I am thinking." This sentiment has been echoed by numerous Fed officials, and as a result, the Dollar Index—a trade-weighted basket of currencies against the Dollar—has declined by over 1%.
Key Movers
The single currency has traded marginally higher against the Dollar and lower against the Pound this week as markets grapple with assessing how many interest rate cuts Central Banks will implement before the year-end. In Europe, the ECB faces the challenge of dealing with persistently high inflation alongside very weak economic growth. Recent comments from ECB officials suggest that they are more concerned about slowing growth than inflation, leading markets to increase expectations for rate cuts sooner rather than later.The Pound has remained resilient against both the US Dollar and the Euro as economic data continues to indicate signs of economic expansion. In a recent interview with the Kent Messenger newspaper, Bank of England Governor Andrew Bailey stated, "I do think the path for interest rates will be downward, gradually." His remarks have boosted confidence that inflation will continue to moderate toward the 2% target rate through 2025.
Federal Reserve Governor Michelle Bowman called for a "more measured approach" to cutting rates this week, noting that she "continues to see greater risks to price stability, especially as the labor market continues to be near estimates of full employment." As a result, markets have substantially increased expectations for another 50 basis point cut by the Fed at their next policy meeting.
Expected Ranges
- GBP/USD: 1.3360 - 1.3410 ▼
- GBP/EUR: 1.1960 - 1.2015 ▼
- GBP/AUD: 1.9445 - 1.9490 ▼
- EUR/USD: 1.1135 - 1.1185 ▼