Focus on the Fed today

The dollar continues to gain ground against the yen following the Bank of Japan’s latest monetary policy decision and is now trading north of Y151. It is largely unchanged though against the euro ($1.0860) and sterling ($1.2710) ahead of the conclusion of the Fed’s two-day meeting later today, with EURGBP also unchanged (£0.8550). CPI inflation data released in the UK earlier this morning were broadly in line with market expectations and have had little impact on the pound.

Equity markets had a positive session yesterday with European and US stocks both gaining around half a percent. In government bond markets, yields reversed course to end marginally lower on the day and are edging down this morning as well (with UK yields leading the way).

The annual rate of headline CPI inflation in the UK fell to 3.4% in February from 4% in January, the lowest reading since September 2021. The core rate also declined last month, to 4.5% from 5.1%, with falls in both core goods and core services inflation to 1.9% and 6.1% respectively. The Bank of England expects headline inflation to fall to 2% in the second quarter of this year, helped by lower domestic energy bills, before picking up again to 2.7% by year-end.

ECB Vice-President de Guindos says the central bank will have “a lot more data in June” to better evaluate its monetary policy decisions,  while his colleague Kazaks suggests three quarter-point cuts will be “appropriate” this year.

The Fed is certain to remain on hold at today’s meeting and may again say that it needs “greater confidence” that inflation is heading sustainably to 2% before lowering interest rates. The market sees the Fed beginning to ease policy at its July meeting.

On the economic data front, consumer confidence and construction output in the Euro area are the main releases of note.