GBP
Last Thursday, the Bank of England held rates again at 5.25%. Six of the nine-panel 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.
Overnight interest rate swaps suggest that four rate cuts are priced in for 2024, which would move the bank rate down to 4.25%, although it’s still uncertain whether the first will come in May or June.
The Bank of England also said on Thursday that inflation could fall to 2% in Spring before rising again due to energy costs. If inflation drops to these levels, it may add to any downward pressure on Sterling.
It’s been a relatively quiet week of data releases for Sterling, although the Halifax house price index surpassed expectations by increasing from 1.1% to 1.3%, – markets had expected the house pricing indicator to slow to 0.8% – representing a fourth consecutive month of rising house prices. Sterling has recovered after its sell off early in the week, now trading back at levels we say early Monday morning.
Next week is a busier week for the UK market, with CPI data released on Wednesday (14th February) and GDP figures released on Thursday (15th February). January’s CPI reading reported a 0.1% MoM rise, following what was a fairly steady decline in the inflation data since April 2023. The BoE believe inflation “could fall to 2% for a short while in the spring”. Will Februarys release see us move closer to the central banks target?
EUR
Markets are currently pricing the most rate cuts from the European Central Bank this year (compared with the Fed and BoE), with five or six already priced in. Governing Council Member Mario Centeno seemed to back this narrative with his comments at the Warwick Economics Summit when he implied the ECB would have to react to slowing inflation by loosening monetary policy.
Bloomberg also reported that Centeno highlighted that the eurozone could be in trouble, stating: “We cannot have an economy that does not grow; that’s my main concern about Europe.” He added that after five quarters without growth, “the first quarter of 2024 may be the sixth. This is one and half years of stagnant economy.”
If the economic outlook for the eurozone is as bleak as economists are currently suggesting, the ECB may be forced to cut rates earlier than the Fed and BoE. This could see the Euro continue its slide against the Pound and the Dollar.
Amongst the host of industry and services data that was released this week, perhaps the most notable data miss was Eurozone Retail Sales which came in under forecasts at -1.1% (against a previous reading of 0.3%).
Next week (Monday, 12th February), the EU Economic Forecasts will be released. These quarterly forecasts serve as the European Commission’s basis for evaluating economic performance. It’ll be interesting to see how the EUR responds to any insights that give weight to Ceteno’s earlier comments.
Flash employment data will also be released on Wednesday (14th February).
Disclaimer: This commentary does not constitute financial advice.
