February 01, 2024

“The Federal Reserve gave the dollar a leg up last night as it stressed caution about cutting interest rates in a hurry. The Bank of England comes next this afternoon to jolt the pound, where policymakers are unlikely to give the market what it wants in terms of rate cut discussions.”

Sam Cornford – Head of Trading

Main Headlines

Shell reported a 2023 profit of $28 billion, marking a 30% decline from the previous year’s record due to lower oil and gas prices. Despite the decrease, Shell increased its dividend by 4% and extended its share repurchases. In the fourth quarter, the company’s adjusted earnings, its version of net profit, reached $7.3 billion, surpassing analysts’ expectations of a $6 billion profit but down from the previous year’s record of $9.8 billion.

British Chancellor Jeremy Hunt stated on Wednesday that he does not anticipate the government to have the same ability to cut taxes in the upcoming budget in March as it did during the last budget update in November. Given his party is trailing in opinion polls, Hunt has repeatedly expressed a desire to further cut taxes to stimulate economic growth. However, the International Monetary Fund warned against tax cuts on Tuesday due to high levels of public debt and increasing demands on services.

GBP

Sterling swung up and down in a 0.7% range against the dollar yesterday, having now slipped 0.7% against the dollar since a brief surge following weak ADP non-farm payrolls data out of the US. A quiet day for the pound saw it driven by developments abroad, but the Bank of England meeting today should give it a strong impulse. The MPC is likely acknowledge that inflation is heading in the right direction and drop the bias towards hiking rates, but strong PMI and wage growth data is likely to preclude a significant dovish shift.  Unlike the ECB and the Fed, the BoE has yet to entertain discussions about rate cuts – hints might come today, but few foresee any concrete clues to provide further clarity. The final manufacturing PMI comes first this morning, although a significant surprise would be needed to move the dial for sterling.

EUR

With eyes on the eurozone CPI print this morning, the euro has fallen sharply against the dollar in the aftermath of the Federal Reserve decision last night. German CPI softened more rapidly than expected to 2.9% – the lowest since July 2021 – setting the stage for a fall in the consolidated figure later this morning. Upwards revisions to manufacturing activity in Italy and Spain this morning stemmed losses somewhat this morning, but the overall euro are release remain unchanged. A sparse diary this afternoon puts the focus on the Bank of England and the US data for the major EUR pairs once the dust has settled on the euro area inflation data.

USD

The dollar surged overnight as the Federal Reserve fought off expectations for a March cut, holding rates steady and mostly ruling out a policy move at the next meeting. Initial losses triggered by a lower-than-expected ADP non-farm payrolls figure and easing employment costs were rapidly reversed by the end of the session. While Chair Powell repeatedly praised the US economy and said that risks to the labour market and inflation were moving into ‘better balance’, the press statement also signalled that it would not reduce rates until further confirmatory data assured ongoing progress. Powell did not foresee that this would come by the March meeting but hinted that it was only a matter of time, prompting traders to rapidly scale back the probability of an imminent cut from 60% to 35%. The next cues for this outlook come in the form of jobless claims and the ISM manufacturing PMI this afternoon, before the headline non-farm payrolls report tomorrow, which should indicate persistent resilience in the labour market.

Markets

Stocks fell sharply as investors pushed back expectations of when the Federal Reserve will start cutting rates. The European Stoxx 600 slipped after disappointing forward guidance from Adidas and BNP Paribas triggered slumps of 7% and 8% respectively. Oil prices continue to settle lower this week.

Main Economic Events (All Times CET)

10:00am: Eurozone Final Manufacturing PMI
10:30am: UK Final Manufacturing PMI
11:00am: Eurozone CPI Inflation
1:00pm: Bank of England Rate Decision
2:30pm: US Unemployment Claims
3:45pm: US Final Manufacturing PMI
4:00pm: US ISM Manufacturing PMI

Corporate Events

Earnings include Apple, Amazon, Facebook, and Shell

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