Europe braces itself as peace talks begin between Russia and the Ukraine
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Daily Currency Update
ECB Governing Council member, Fabio Panetta, has been consistently making arguments for looser monetary policy suggesting that the ECB should focus on growth rather than inflation. He added that “restrictive monetary policy is continuing to exert downward pressure on economic activity, an effect that is less and less necessary with near-target inflation and persistently weak domestic demand”. Markets are presently pricing in 75 basis points of cuts by the ECB which would bring the policy rate to 2.0%.Bank of England Governor, Andrew Bailey, said yesterday that Q4 GDP figures released in the UK do not alter the status of the UK economy. Bailey added that “the question of whether supply or demand is behind the UK’s economic weakness will take some time to resolve. The impact of trade tariffs on inflation is much more ambiguous than their impact on growth if they lead to fragmentation of the World economy”.
Federal Reserve committee member, Michelle Bowman, noted yesterday that the Fed’s recent progress on inflation may have been scuppered by rising asset prices. Bowman said that she “expects inflation to continue to fall but upside risks remain. More certainty is needed on declining inflation before reducing rates and patience will allow more clarity on the impact of prior rate cuts by the Fed”. She added that wage growth remains elevated and is above the level consistent with the Fed’s 2% inflation target.
Key Movers
The Eurozone’s Panmure Liberum’s proprietary indicator (PLPI) is showing signs of improvement. The main driver of this is a recovery in new export orders with exports amounting to 51% of GDP in 2024. Other factors pointing in the right direction are stabilising inventory levels and improving investment intentions. The caveat here is that rising global trade tensions from geopolitical risks and trade tariffs could reignite European inflation and curtail growth at this vulnerable stage in the Eurozone’s recovery.The Pound remained steady as markets eye key Q4 employment data due for release later today. Close attention will be also paid to business owners to assess the effect of Rachel Reeves increase in employers contribution to National Insurance ( NI ). The pace of hiring in the UK has slowed sharply in recent months with the UK adding a mere 35k workers in Q4 of last year compared with expectations of 173k. Bank of England policymakers recently have all echoed concern about growth over inflation and the need for lower interest rates.
Federal Reserve President of Philadelphia, Patrick Harker, said yesterday that “presently the US economy argues for a steady monetary policy”. He added that “monetary policy is appropriate now and that future Fed decisions will be data dependant”. Price pressures remain somewhat elevated most notably in the labour market and that the Fed’s stance should one of “continually lowering inflation”. Importantly, even though the economy is acting from a position of strength it is unclear what impact the new administrations policies will have.
Expected Ranges
- GBP/USD: 1.2585 - 1.2640 ▲
- GBP/EUR: 1.2030 - 1.2065 ▲
- GBP/AUD: 1.9815 - 1.9865 ▲
- EUR/USD: 1.0445 - 1.0490 ▲