Market Report - 30/07/2024
Markets await Central Bank rate decisions
Markets are now eagerly awaiting the release of key risk events over the next few days, meanwhile the FX market has experienced notable volatility this week already.
Investors are closely monitoring key interest rate decisions from major central banks, including the Federal Reserve (FOMC) and the Bank of England (BOE). As well as that, there is a keen eye being kept on the Eurozone as we have GDP releases and German CPI data before the week of pivotal economic data comes to an end with the US NFP report.
Federal Reserve (FOMC) Decision:
The Federal Open Market Committee (FOMC) is set to announce its latest interest rate decision on Wednesday evening. The Federal Reserve is widely expected to leave rates unchanged this week, but to cut them by a quarter point at the following meeting in September.
While the FOMC does not meet in August, Fed chair Jerome Powell could use the Jackson Hole gathering of central bankers in late August to prepare the market for a rate cut. By then more data on inflation and Friday's July employment report will be available for policy makers to weigh conditions for a September cut.
The U.S. Dollar (USD) has already seen some appreciation in anticipation of the FOMC decision. Traders are positioning themselves for no action from the FOMC, which could further boost the dollar against major currencies. However, any dovish signals or hints at a pause in future rate hikes could temper the dollar's gains.
Bank of England (BOE) Decision:
The Bank of England's Monetary Policy Committee (MPC) will also announce its interest rate decision on Thursday. The BOE faces a challenging economic landscape, with inflation also running in line with the banks 2% target but economic growth showing signs of slowing. The debate among policymakers has been intense, with the expectation that 5 members will vote for a 25bps cut, while the remaining 4 caution against stifling economic recovery and leaving rates unchanged.
The British Pound (GBP) has been under pressure slightly this week amid economic uncertainties and mixed signals from the BOE. With a cut being predominantly priced in, ‘no action’ from the MPC could provide some short term support to the pound, but much will depend on the accompanying statement and economic outlook provided by the MPC. Any rate cut or tones of a cautious approach or concerns about economic growth could weigh on the GBP and potentially bring into play levels of 1.27 vs the USD and low 1.18’s vs the EUR.
Possible Market Reactions:
1. GBP/USD: The currency pair is likely to see significant movement this week. A more hawkish Fed paired with a cautious BOE could lead to further USD strength against the GBP. Conversely, if both central banks lean towards a more dovish stance, the pair might see a more balanced movement.
2. EUR/USD: The Euro (EUR) has been consistently losing value across the board recently, however paired with the USD devaluation as well has seen EURUSD remain stable above 1.08. This pair could come under pressure if the USD strengthens post-FOMC. The European Central Bank (ECB) has maintained a more dovish stance, focusing on supporting economic growth, which could contrast with a hawkish Fed. Additionally, EU GDP data and German CPI releases will also be cause for fresh impetus
3. GBP/EUR: The BOE's decision is likely to impact the GBP/EUR pair. A BOE rate cut could lead to a weaker GBP against the EUR, although if Andrew Bailey decides to hold until September / October, we could see short term relief. In my opinion, the statement and press conference that follows, coupled with any forward guidance from MPC policy members is likely to be the main cause for volatility.