February Review

The range for GBP/EUR was less than 1% last month, while the range for GBP/USD was less than 2%.

This has brought much more stability and certainty around FX costs and returns, especially after the past two years of high volatility and generally high uncertainty in financial markets, which we haven’t seen often over the past two years.

February kicked off with a slew of central bank meetings. The first was the European Central Bank’s meeting at the end of January, where it opted to hold rates steady, before both the Bank of England and the Federal Reserve, followed suit. All three decisions were as the markets had expected, but what was most interesting was the subsequent commentary.

The ECB's statements following the meeting were more dovish, suggesting that an interest rate cut is being lined up and weakening the EUR, which sunk to six-week lows following the decision. The question now is not if they will cut interest rates but when. To add to the speculation, Reuters reported that anonymous policymakers said they were open to a change in rhetoric at the next meeting and a possible rate cut in June if Europe was further along the disinflation process after the meeting.

Six of the nine-panel Bank of England monetary policy committee voted to leave rates where they were, while two voted to increase rates to 5.5%, and one member voted to cut rates. This was the first time in four years that a policymaker had voted to reduce rates. The Bank of England followed its meeting with an update on inflation, which it forecasted could fall to 2% in Spring before rising again due to energy costs. If inflation does drop to these levels, it could add to any downward pressure on Sterling.

Federal Reserve Chair Jerome Powell was more hawkish, reiterating that a March interest rate cut would be very unlikely. However, the Fed will still be keeping a firm eye on economic data before the March meeting; any signs of inflation closing in on 2% could prompt policymakers to cut rates. Treasury yields jumped following Powell’s comments as traders began to discount a March cut.

Since those rate meetings, the picture of future rate cuts has changed significantly. Markets now expect the first rate cuts to come in the second half of the year.

March Outlook

The risk over the coming weeks and months is that there will be a breakout of the ranges we’ve been seeing at some point. This could be fast and unpredictable and could be a question of when rather than if.

This month sees much more high-impact data and economic events, including the UK Government’s Spring Budget, a European Central Bank meeting, a US Federal Reserve meeting, and the Bank of England meeting. All of these events have the potential to be market-moving.

Things kicked off with the UK’s budget on Wednesday last week, which will likely be the last fiscal event before the next general election, which is thought to be coming during the second half of the year. Jeremy Hunt was careful not to throw out any huge tax-cut surprises, with the Truss/Kwarteng mini-budget still fresh in recent memory, but with the Conservative party under increasing pressure, as we roll towards the still unknown election date, Hunt would have been keen to make an impact.

There was a big focus on personal tax cuts, with Hunt announcing a second 2p reduction in National Insurance. The move seemed to pave the way for the complete abolishment of the tax, which Hunt called “unfair” and a double taxation of work that penalised it rather than encouraging it.

The pound remained on a positive footing following the budget as it was broadly in line with market expectations and didn’t impact the anticipated rate cuts will come from the Federal Reserve and the European Central Bank before the Bank of England makes its move.

Regarding the central bank meetings, the ECB met last week and opted to hold rates steady for the fourth consecutive meeting despite lowering its inflation forecast from 2.7% to 2.3% this year. However, the news could impact future decisions. ECB President Christine Lagarde’s comments seemed to align with market expectations that we could see the first rate cut in June, saying, “We will know a little more in April, but we will know a lot more in June.”

It is also unlikely that we will see interest rate cuts from the US Federal Reserve or the Bank of England when they meet on the 20^th and 21^st April, respectively. However, all three central banks are expected to cut rates in the second half of 2024. The market continues to watch commentary closely to try to get a better read on exactly when that could be.

In contrast, the Swiss National Bank is priced at an almost exactly 50/50 chance of an interest rate cut on 21st March, which could make it the first European policymaker to take the plunge.

The noise also continues around the political situations in the UK and the US, with both countries heading for general elections this year. Donald Trump’s way back to the White House seemed to be all but cleared last week after the Supreme Court unanimously decided that Colorado could not disqualify him from running for president again.

Trump went on to sweep victory on Super Tuesday, scooping almost all of the primaries, which resulted in his last remaining rival, Nikki Haley, calling time on her presidential campaign.

In the UK, Labour still has a significant lead over the Conservative Party. Although the latest polling data has not been released since the budget, Rishi Sunak and Jeremy Hunt will be hoping their tax cuts will have made a dent in Labour’s 20-point lead.

Data sourced from Bloomberg

This commentary does not constitute financial advice and all quoted rates are sourced from Bloomberg.