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Fed pours cold water on March cut, Bank of England up next

European markets finished the month on a down note with the FTSE100 posting its worst month since October last year, with a decline in US markets acting as an anchor on the wider market.

While the FTSE100 had a disappointing month, the CAC 40 and DAX managed to start 2024 with some modest gains as well as managing to achieve new record highs during the month.

US markets also ended what was a strong month very much on a downswing, with the S&P500 posting its biggest one day fall since September, after the Federal Reserve kept rates unchanged, but in the statement came out less dovish than had been expected, with Fed chair Jay Powell leaning against the idea of a March rate cut during the ensuing press conference.

As far as the statement was concerned, the reference to possible additional rate hikes was removed, while in its guidance the central bank stated that it does not expect it will be appropriate to cut rates until there is greater confidence inflation is moving sustainably towards 2%.

The tone of this line in the guidance leant very much against the prospect of a March rate cut, a line that Powell kept very close to.

It was notable that the accompanying statement maintained that job gains have remained strong despite having slowed, and that inflation remains elevated.

At the press conference Powell faced a varying number of questions but the one that moved the markets the most was when he said that he thought a March rate cut was unlikely, and not the Fed’s base case, which pulled yields off the lows of the day, and sent stocks to the lows of the day.

Having seen the Fed pour cold water on market expectations of a March rate cut last night, today we get the latest from the Bank of England, where the rate of UK inflation is slightly more elevated, although is still slowing sharply.

When the MPC took the decision to hold rates steady in September it was a close-run thing, but on the balance of risks it was the right one given the challenges facing the economy as we head into year end, and which were borne out by the -3.2% decline seen in December retail sales at the end of last year.

At the December meeting there was a 6-3 split on rates with the 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel all voting for another 25bps rate hike due to concerns over higher levels of domestically driven inflationary pressures.

Their caution was understandable given the high levels of services inflation which slowed to 6.1% in December and wages growth which slowed to 6.6% in the 3-months to November.

In the aftermath of the December hold and the deterioration in some of the recent economic numbers there had been some expectation that the Bank of England might cut sooner rather than later, however the recent rhetoric from the likes of Governor Andrew Bailey suggests that isn’t the case.

The December uplift in UK inflation to 4% serves to highlight the challenges facing the Bank of England in returning inflation to its 2% target and show that the process is unlikely to be linear.

No changes are expected to monetary policy today with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. Of the 19 meetings Catherine Mann has voted in she has voted to increase the base rate at 17 of them so a hold will be a rare event for her.

There is also the possibility of a dovish outlier with the potential for Swathi Dhingra voting for a rate cut, prompting a split in the opposite direction to what we saw in December.

Since joining the MPC Dhingra has only voted to raise rates twice in the 11 meetings she has voted in, so if anyone is going to break ranks and starting voting to cut rates it will be her.

Like the Fed last night, the main debate now remains on when we start to see rate cuts and not if.

The timing of when to expect the first rate cut is also a live one at the European Central Bank, with Bundesbank President Joachim Nagel softening his tone with respect to his hawkishness around inflation, the timing of which was particularly timely given yesterday’s awful German economic numbers on retail sales and import prices. Today’s EU flash CPI numbers for January are expected to see a modest slowdown from the jump to 2.9% to 2.7% with the month-on-month number set to fall by -0.8%. Core prices are expected to slow to 3.2%.

We’re also set to see the latest manufacturing PMIs confirmed at the weak readings we saw in the flash numbers for France and Germany at 43.2 and 45.4 respectively.  

On the data front US weekly jobless claims are expected to come in at 212k.

EUR/USD – currently flitting between the 1.0800 and 1.0900, but still finding solid support in and around the 1.0790/1.0800 area, raising the prospect that we could see a move towards the 1.0720 area. Resistance at the highs last week at 1.0930 and behind that at 1.1000. 

GBP/USD – the 50-day SMA continues to support the downside with support further down at the 1.2590 area. We need to get above 1.2800 to maintain upside momentum and target the 1.3000 area.

EUR/GBP – still finding solid support above the 0.8500 area, while finding selling interest at the 0.8570/80 area. While below this resistance the risk remains for a move towards 0.8470. Above 0.8580 potentially targets the 0.8620 area.

USD/JPY – slipped below the lows of last week at 146.65 area, opening the possibility of a move towards the 50-day SMA at 145.80. Resistance remains back at the January highs at 148.80, as well as the highs this week at 148.20.


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