Dollar jumps post Fed
The Fed lowered interest rates by 25bps at yesterday’s meeting, as expected, and guided a further 50bps reduction in 2025, less than the 100bps it had previously indicated – reflecting a firmer inflation forecast for next year – but in line with market pricing ahead of the meeting. However the market now believes it’s more or less a case of one more 25bps cut and the Fed is done, prompting a spike in US bond yields and an accompanying jump in the dollar, with higher yields also triggering a sharp sell-off in US equity markets. The euro and sterling are down around a cent against the dollar from their pre-meeting levels at $1.04 and just over $1.26 respectively (albeit off their immediate post-meeting lows of $1.0350 and $1.2560), leaving EURGBP a little lower this morning at £0.8240. Next up it’s the Bank of England – it is expected to keep rates on hold at 4.75% today and is likely to reiterate that a ‘gradual’ approach to lowering them remains appropriate.
US government bonds yields rose sharply post the Fed rate decision, ending the day 10bps to 15bps higher across the curve (benchmark 10-year yields are now at a circa 7-month high of just over 4.5%), while not surprisingly German and UK yields have risen this morning. US stocks sold off heavily, shedding 2.5% to 3.5% on the day, while European markets are down more than 1% at the start of play today.
The Fed’s 25bps rate cut (to 4.25%-4.5%) brings the cumulative reduction since last September to 100bps. As a result, the stance of monetary policy is now ‘significantly less restrictive’ (albeit still ‘meaningfully restrictive’) according to the Fed, hence it can be ‘more cautious’ as it considers additional policy adjustments, with the ‘extent and timing’ of further rate cuts depending in part on continuing progress in lowering inflation.
For the day ahead, the focus will be on the Bank of England Monetary Policy Committee’s (MPC) latest interest rate decision. It is expected to stay on hold at 4.75%, following last month’s quarter-point reduction. In its November economic projections the MPC revised up forecasts for GDP growth and inflation in the short-term, largely on account of the measures announced in the autumn budget. Inflation was expected to rise to 2.8% over the second half of 2025 before falling back to the 2% target over the following two years. This was conditioned, among other things, on interest rates declining to 3.75% by the end of 2025, pointing to a gradual reduction in rates during the course of next year. The market though has pared back expectations for rate cuts following this week’s stronger than expected wage growth data and now sees the MPC lowering rates by just 50bps in 2025.
Meanwhile, it is quiet on the economic data front, with the regular weekly jobless claims and a third estimate of third-quarter GDP growth in the US the only releases of note.