US leave rates unchanged as Fed policymakers nervously monitor inflation
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Daily Currency Update
ECB policymaker, Francois Villeroy de Galhau, said yesterday that the size and timing of ECB rate cuts will strictly depend on data. He added that inflation will reach their 2% target rate by 2026 and also that “increasing defence spending across Europe was the number one priority”. Finally, he said there is a need to guarantee budget stability in accordance with the bloc's fiscal rules. The single currency showed no immediate reaction to these comments and was last seen losing 0.4% on the day.In the UK, a growing number of analysts are concerned about the UK’s lack of progress on Gross Domestic Product (GDP). There are fears that high rates are stifling growth and limiting spending in the real economy, which are justified. The UK grew 0.1% in the fourth quarter of 2024 after a no growth Q3 2024, and figures released last week showed a unexpected contraction in UK GDP in January of this year, most likely caused by lower production output.
Federal Reserve officials meet this week to set interest rate policy against the backdrop of a stock market sell-off, gloomy economic news and a mounting trade war. Fed officials are in a difficult position as inflation sits stubbornly at 2.6% and the risks are skewed to the upside as tariffs may cause further spikes in broader prices. Consumer sentiment in the US is in free fall, spending is slowing, and once-small cracks in the labour market are widening. These factors are likely to keep the US Dollar on the back foot through Q2.
Key Movers
Christine Lagarde, President of the European Central Bank, said that “in this environment of uncertainty, a strong commitment to maintaining price stability over the medium term is more important than ever. This commitment will require agility to respond to new shocks, albeit within a well defined framework that limits short-sighted reactions and unbridled discretion”. The ECB are grappling with how they can navigate this more volatile era while helping to reduce, rather than amplify, uncertainty.In the UK it is widely expected that the Monetary Policy Committee (MPC) will leave interest rates unchanged when they meet later today. Analysts expect all but two committee members voting to leave interest rates unchanged. Markets have significantly more trepidation about the UK budget, due for release later this month, and the risks for the Pound. Sterling negative scenarios are predominant as Chancellor Rachel Reeves will either slash spending, raise taxes or risk unnerving the UK gilt market.
The US Federal Reserve Chairman, Jerome Powell, said the Central Bank will “not be in any hurry to move on rate cuts”. He cited that the labour market remains resilient but inflation remains somewhat elevated. He added that the Fed purposefully decided to slow the pace of rate cuts as global geopolitical uncertainty and trade tariffs mean they will wait for further clarity on the effects before reducing borrowing costs further. The Dollar remained muted after the Fed decision.
Expected Ranges
- GBP/USD: 1.2960 - 1.3015 ▲
- GBP/EUR: 1.1900 - 1.1950 ▲
- GBP/AUD: 2.0510 - 2.0555 ▲
- EUR/USD: 1.0865 - 1.0920 ▲