Currency markets remain in a state of flux ahead this week’s Federal Reserve (Weds) and Bank of England (Thurs) interest rate meetings.
Investors are bracing themselves for the first US Federal Reserve interest rate cut since 2020. The ongoing question is whether this will be a more conservative 0.25% cut or a larger 0.5% cut. Swings in recent market expectations have created a lot of volatility in the USD and we expect this to continue into and after Wednesday’s decision. Traders are currently pricing in around a 59% chance of the larger 0.5% cut and therefore it’s still very much in the air. Along with the rate cut, analysts will also be focusing on the bank’s projections for the future path of interest rates over the next few years. So, regardless of the size of the cut, the tone in the accompanying statement and their future projections could also play a large part in how the USD performs in the coming weeks.
As anticipated, the European Central Bank cut interest rates by 0.25% on Thursday. They also lowered their growth forecasts but at the same time adjusted their core inflation estimates higher. Importantly, they signalled that another rate cut in October was very unlikely, which helped to counter the weaker growth outlook and ultimately helped support the Euro. This was particular evident against the USD where it seems the paces of cuts in the Eurozone will be at a slower pace than across the Atlantic.
The Pound remains relatively buoyant moving into this week’s Bank of England meeting. Although last week’s UK growth data missed expectations, it hasn’t materially altered the view that the UK economy is performing much better than economists had expected at the start of the year. In particular, the labour market is proving particularly resilient and inflation remains around the BoE’s 2% target. Markets are therefore expecting the BoE to keep rates on hold this week, as it’s likely policymakers will want to continue monitoring the data for further clues on when to next act. Consequently, Pound traders will instead be paying very close attention to the voting pattern. A close vote, with a handful of dissenters in favour of an immediate cut, could trigger some downside in the pound.
As a result, the GBP/USD has recovered nearly 2-cents from last week’s low and now trades at a 10-day high. The GBP/EUR continues to trade within a relatively tight range but towards the upper end of the past week. The EUR/USD has risen around 1% from last week’s low and now trades around a 2-week high.
