Dollar firmer post Fed meeting
The Fed left interest rates unchanged following its latest meeting and ruled out a cut in March, while indicating a willingness to lower them later in the year. The dollar extended its gains post the meeting amid a continuing fall in US stocks, reversing an earlier decline following the release of softer than expected economic data. It is trading just below $1.08 and at around $1.2650 to the euro and sterling respectively this morning, leaving EURGBP largely unchanged north of £0.85
US bond yields declined further following the Fed meeting as the sell-off in stocks accelerated, with 10-year yields closing around 10bps lower on the day (although they have nudged back up a little in overnight trading). US equity markets finished well down, with the S&P 500 shedding around 1.5% and the Nasdaq losing more than 2%.
The Fed kept policy on hold for a fourth consecutive meeting, leaving interest rates in the range of 5.25-5%. It said it “does not expect it will be appropriate to reduce (rates) until it has gained greater confidence that inflation is moving sustainably toward 2%”, with Jerome Powell saying it is unlikely that the Fed will have gained that “greater confidence” by the March meeting. It seems only a matter of time, though, before it does begin to lower rates.
Employment in the US rose by less than expected in January according to the latest ADP report – the official jobs data for January will be published this Friday – while wage growth slowed a bit more than forecast in the final quarter of 2023, according to the Employment Cost Index, and continues to move closer to levels consistent with inflation of 2% over time.
The annual rate of inflation in Germany fell by slightly more than forecast last month coming in at 3.1%, down from 3.8% in December. Inflation data for the Euro area are due later this morning, with the consensus expecting a decline in the headline and core rates to 2.7% and 3.2% respectively (from 2.9% and 3.4% in December).
The Bank of England’s MPC announces its latest interest rate decision today alongside its February Monetary Policy Report. The larger than expected decline in UK inflation over the latter part of 2023 should be enough to persuade the majority of members to again keep policy on hold. Whether it is enough for any or all of the recent (three) dissenters to join them remains to be seen, though it wouldn’t be a surprise if there was one or more votes to hike. In any case, the MPC is likely to reiterate that rates need to be “restrictive for an extended period” to ensure inflation returns to the 2% target.
As well as Euro area inflation, other economic data due today include Euro area unemployment; manufacturing PMIs in the main economies (final readings for January); and the ISM manufacturing index and jobless claims in the US.