Market Report - 21/03/2024
Dovish FOMC moves Dollar lower ; Markets await BoE rate decision
As we enter into the quiet period before the Bank of England announce their latest interest rate decision, and following yesterday’s UK CPI release & the FOMC rate decision last night – I thought a brief update would be useful.
Yesterday, it was announced that UK inflation fell to 3.4% in February, which is the lowest level for two and a half years. This data was made public according to official figures from the ONS that showed the annual rate of price rises starting to ease after remaining unchanged from the previous month.
Rishi Sunak, who has promised to lower inflation will benefit from the consumer prices index (CPI) declining from 4% in January. It also fuels anticipation that the Bank of England could lower interest rates as soon as the summer. The majority of experts had anticipated that the Office for National Statistics (ONS) will release its headline number for February at 3.5%, the lowest level since September 2021 when it was 3.1%. A decrease in the inflation rate does not indicate a decline in prices; rather, it indicates a slower rate of increase.
With the natural gas price having dropped significantly since the previous year and the rate of increase in food prices slowing down, investors are placing bets that inflation will continue to reduce during the spring.
In the USA, markets are currently reacting to the Federal Reserve meeting last night; where they left rates un-changed once again as most investors predicted. This was a unanimous decision from the FOMC, with the rate range being left at 5.25-5.5%. The main take-away from this meeting was the forward guidance given from Fed Chair Powell when looking at potential rate cuts for the year ahead. Considering the updated economic projections from the U.S over the course of the last few weeks, markets were pricing in the possibility that the Fed could have changed their rate cut forecast to only two this year, veering away from the four they had forecast at the December meeting.
Despite the hawkish expectation, Jerome Powell announced that the FOMC were still forecasting three rate cuts this year; which was a dovish surprise and actually saw the USD widely sold off as a result. A broadly softer US Dollar provided some support for the GBP/USD pair, which saw cable regain levels of 1.28 as markets opened on Thursday morning. Market makers will now await this afternoon’s Bank of England meeting for fresh impetus on GBP & USD crosses.
Moving to the day’s key risk event – the Bank of England are set to release their next interest rate decision & conduct a corresponding press conference at 12pm GMT. Andrew Bailey and the MPC are not anticipated to alter the banks forward guidance today. Put another way, even though inflation has been heading in the right direction, there won't be a briefing regarding the date of the first rate cut. Additionally, if the MPC votes in the same order as they did in February—2 (raise), 6 (unchanged), and 1 (cut)—the GBP/USD pair should continue to rise and possibly test resistance in the 1.2850/2900 region. We don't think a single vote in favour of a raise that shifts to an unaltered position needs to be cast.
In regards to the Euro, it has been a mixed bag for the Eurozone economy this month. It appears that the region’s services sector continued to recover however European manufacturers are still feeling the pinch. Additionally, we’ve started to see slow output in France and Germany which is concerning given that these economies have historically underpinned the Eurozone. It looks like a reasonable quiet end to the week for European data with the focus now being upon UK and U.S data mentioned above.