Dollar lower post Fed
The Fed left interest rates on hold following yesterday’s meeting but again said it is likely to lower them in 2024, with its updated “dot plot” still indicating three quarter-point cuts by the end of the year. The dollar has lost ground on the back of this, shedding almost a cent against both the euro and sterling to trade at around $1.0920 and $1.2775 respectively this morning and also giving up some of this week’s gains against the yen (back to around Y151). EURGBP remains unchanged at £0.8540 ahead of the Bank of England’s monetary policy announcement at midday.
US rate cut expectations have firmed post the meeting. The market is now pricing in about a 65% chance of a 25bps cut in June (up from circa 50% before the meeting), with such a move fully priced for July, and about 75bps worth of cuts in total by the end of this year (about 10bps more than pre-meeting). This in turn has contributed to a decline in US 2-year bond yields, which closed almost 10bps lower yesterday. US stocks also rallied post the Fed, with the S&P 500 ending the session with gains of almost 1%.
The Fed reiterated that it still needs “greater confidence” that inflation is returning sustainably to its 2% target before cutting interest rates. It said recent inflation readings hadn’t added to its confidence in this regard, but it still believes inflation is on a “bumpy road” back to 2% which in turn will allow it to lower rates later this year.
ECB President Christine Lagarde all but confirmed a cut in interest rates in June in a speech yesterday. However she also said that, because domestic inflation pressures are likely to remain prominent this year, with services inflation expected to remain elevated, the ECB cannot pre-commit to further rate cuts beyond June.
The Swiss central bank surprised markets earlier this morning by announcing a cut in interest rates, lowering its policy rate by 25bps to 1.5%, saying its fight against inflation over the past two years has been effective.
The Bank of England is next up. It announces its latest policy decision later today with rates certain to remain on hold, though it will be interesting to learn if there are still dissenting voices in favour of raising rates (two members voted for a 25bps hike in February). More generally, the BoE is likely to say that it needs to see further declines in both wage and services inflation before it can consider lowering rates.
Economic data due today include flash PMIs for February in the Euro area, UK and the US, with jobless claims and existing home sales scheduled in the US as well.