Dollar firmer post Fed; BoE up next

There’s been a muted enough market reaction to the Fed’s latest policy decision. It left interest rates unchanged, as widely expected, and indicated it is likely to remain on hold for a while longer yet as it assesses the impact of tariffs on the US economy. In FX, the dollar has gained some ground against the euro and sterling, trading at around $1.1290 and $1.3280 respectively. EURGBP remains in a tight range, still hovering around the £0.85 level. Reports this morning that the US will announce a trade ‘deal’ with the UK later today have left the pound largely unmoved, while the Bank of England announces its latest interest rate decision at noon with the market fully expecting a 25bps cut to 4.25% (with one or two dissents in favour of a 50bps move possible).

Expectations for Fed rate cuts remain intact post yesterday’s meeting, with about 75bps of easing still expected by the end of the year. In bond markets, US yields ended marginally lower on the day, while German and UK bonds outperformed with 10-year yields falling by 6-7bps (though this was partly catch-up with Tuesday’s decline in US yields). In equity markets, US stocks closed higher again, albeit gains were modest (+0.4% for the S&P 500), but European indices ended in the red for a second day running.

The Fed left rates unchanged in a range of 4.25%-4.5%, noting that “recent indicators suggest that economic activity has continued to expand at a solid pace.” It said that, largely because of tariffs, the “risks of higher unemployment and higher inflation have risen”, which if both were to materialise would obviously make the job of setting monetary policy more difficult. But for now, with labour market conditions still solid and inflation still slightly above target, the Fed say it’s appropriate to keep rates at the current ‘moderately restrictive’ level.

The main focus today will be on the Bank of England’s latest interest rate decision. It has been gradually lowering rates since August last year, cutting by 75bps over this period, as it responds to relatively subdued economic growth on the one hand but still elevated, albeit declining, wage growth and services inflation on the other. The market expects it to cut rates by a further 25bps at today’s meeting, maintaining the pattern of easing policy every three months at the time of its updated forecasts for growth and inflation, and is pricing in almost 100bps of cuts in total over the remainder of this year. Meanwhile, in terms of economic data, the main releases are weekly jobless claims and Q1 productivity & labour costs in the US.