Market Report - 11/04/2024
US inflation springs surprise ; ECB keep rates unchanged
Investors were caught by surprise at yesterdays announcement that inflation has risen to 3.5% in the US. The Consumer price index rose to 3.5% on a yearly basis in March, from 3.2% in February, meaning inflation came in above the market expectation of 3.4%.
Following the surprise reading, markets began to slash bets on the chances of 3 rate cuts throughout 2024, with now only 1-2 cuts to be expected. The higher than expected inflation will be seen as a real issue for the Fed, who have been trying to combat stubborn inflation over the past two years now. The latest reading caused increased volatility in the FX markets yesterday as the US dollar reacted quickly and saw both GBPUSD and EURUSD drop a cent.
Today the main event saw Christine Lagarde announce the latest rate decision from the ECB, where there were no surprises and rates were left unchanged. However, Lagarde signalled that whilst inflation has continued to fall, the eurozone economy has remained weak in the first quarter of 2024. She warned that manufacturing firms are facing weak demand and production has been subdued, with lots of firms in the EU absorbing part of the rise in labour costs therefore impacting their profits. Lagarde also insisted that the ECB remains determined to bring inflation down to their 2% in a timely fashion.
Before the announcement there were suggestions circling that the ECB could signal toward a rate cut this June, though Lagarde would not be drawn to any time commitments on rate cuts despite “a few members” of the governing council who believe there is sufficient data to have made rate cuts today.
The reaction of the FX markets saw the trend of dollar strength continue, with GBP/USD dropping a further 0.3% following the announcement, to currently trade towards the daily low of 1.2515. The two previous levels of support were easily by-passed with the safe haven demand following yesterday’s CPI shock, and now a breach south of 1.2490 is deemed a possibility by market analysts.
EUR/USD has suffered a similar fate, dropping over a cent and a half from open yesterday. At time of writing the rate had just touched 1.07 flat, making it increasingly likely that we see lows not noted since November 2023.
This dollar strength makes it an interesting time for USD sellers who may be looking at covering off any requirements for the summer months ahead. Should this be the case, or if you would like further information – please don’t hesitate to get in touch.