The main currency pairs were little changed overall last week, trading in very tight ranges, as the market pushed out the timing of rate cuts and pared back the expected scale of policy easing by all three main central banks – Fed, ECB and Bank of England – this year. The euro and sterling are trading just shy of $1.09 and a little under $1.2650 against the dollar respectively this morning, with EURGBP at about £0.8550.
Sovereign bond yields rose further last week, having spiked higher at the end of the previous week, increasing by 10-20bps across the curve. In equity markets, the S&P 500 in the US closed Friday at a new record high just north of 5000, having gained almost 1.5% on the week, while European stocks advanced by almost 1.5% as well.
Following a flurry of central bank commentary last week, the market is now not pricing in a full-quarter point rate reduction from the Fed and ECB until their respective June meetings – it’s not so long ago that it thought cuts in March were on the cards – and has pared back the scale of expected easing this year to about 100-125bps. A first full 25bps cut from the Bank of England has been pushed out to August with circa 75bps worth of easing expected by end-2024.
ECB member Panetta, who is a noted dove, says that, with “disinflation…at an advanced stage, the time for reversal of the monetary policy stance is rapidly approaching,” suggesting he’d prefer a start to rate cuts before June. Meanwhile, his colleague, De Cos, notes that the ECB’s updated macroeconomic projections in March “will be key to assessing, first, whether we can be sufficiently confident that our 2% (inflation) target will be achieved…and second, the (interest) rate path that is compatible with reaching our (inflation) target.”
Economic data was very thin on the ground last week, but that changes this week with a heavy scheduled of releases including US and UK CPI inflation tomorrow and Wednesday respectively and Q4 labour market and GDP reports in the UK on Tuesday and Thursday respectively. Central bank speaker this week include BoE Governor Bailey today and ECB President Lagarde on Thursday.