Fed set to cut rates again
The dollar lost ground for a second week running, shedding around half a percent against a basket of other currencies. Friday’s as-expected inflation data in the US copper-fastened market expectations that the Fed will lower interest rates at this week’s meeting (announcement on Wednesday). A 25bps cut – to 3.5%-3.75% – would bring the cumulative reduction since September 2024 to 175bps and leave the policy rate just above the top of the Fed’s estimate of the range for the neutral interest rate. This, together with likely dissent in favour of keeping rates unchanged at this meeting, suggests Fed Chair Powell may strike a cautious tone regarding the scale and timing of any further cuts, which may lend some support to the dollar in the near-term. EURUSD and GBPUSD start the week at about $1.1650 and $1.3330 respectively, towards the top of last week’s trading ranges, while EURGBP is hovering just below £0.8750.
Government bond yields backed up last week, triggered by a sharp spike in Japanese yields on Monday. US and German 10-year yields increased by around 10-12bps, closing at their highs for the week on Friday, while UK bonds outperformed albeit yields still rose by around 5bps. Meanwhile, equity markets gained ground for a second week running as they continued their recovery from late November’s lows, with the S&P 500 in the US and Europe’s STOXX 600 both adding almost 0.5%
Friday’s inflation data in the US were in line with expectations. Headline PCE inflation nudged up to 2.8% in September from 2.7% in August, bringing the increase from its March low to 0.5% points. Core inflation – excluding energy and food prices – nudged down to 2.8% from 2.9%, with a further (tariff-related) increase in goods inflation (to 1.2%) more than offset by declines in housing inflation (to 3.7%) and services ex housing inflation (to 3.3%).
ECB’s Schnabel says inflation in the Euro area is in a good place, albeit services inflation is stickier than expected, which alongside solid domestic demand and fiscal expansion suggests interest rates are likely to remain steady for some time.
Looking to the week ahead, the main focus for markets will obviously be the Fed meeting which begins tomorrow and concludes on Wednesday. It is relatively quiet on the economic data front, with weekly jobless claims in the US on Thursday and GDP for October in the UK on Friday the main releases of note.