ECB meeting the focus today

The euro has gained ground against the dollar following Fed Chair Powell’s testimony to Congress and some slightly softer than expected US labour market data, with the single currency trading close to $1.09 (its highest level since early January) ahead of today’s ECB meeting. The pound is also slightly firmer against the dollar just shy of $1.2750, while EURGBP remains tightly range-bound at £0.8550

In government bond markets, US 10-year yields fell further (down around 5bps or so) while equivalent German and UK yields were flat on the day. Equity markets had a positive session, with the S&P 500 gaining around 0.5%, partially reversing Tuesday’s decline, and European stocks also adding about half a percent.

In his remarks to Congress, Powell reiterated that interest rates have peaked and the Fed is likely to lower them this year, but it wants to “gain greater confidence” that inflation is headed sustainably towards 2%” before doing so (with Powell again saying that inflation does not have to be all the way back at 2% before rates are cut). The market continues to price in a first full 25bps rate reduction at the July meeting.

The Spring Budget in the UK was very much as leaked, with the Chancellor cutting employee National Insurance (NI) further and stealing Labour’s thunder by announcing an overhaul of the “non-dom” tax regime. The budget raised borrowing slightly versus previous plans, while the OBR estimates it will boost GDP by around 0.3% over the next few years (partly due to slightly higher labour supply on foot of the NI cut).

The focus today is on the ECB’s latest monetary policy meeting. At the January press conference, Christine Lagarde said the “declining trend in underlying inflation has continued” but “we need to be further along in the disinflation process” before considering lowering interest rates. In this regard, the ECB will probably want to see some further decline in core inflation, which is still running north of 3%, before it gives the green light to rate cuts, so caution may again be the order of the day at this meeting.