February 06, 2025

“The Bank of England are set to cut by 25bps today to 4.50%, and markets are expecting at least a further two before the end of 2025. Sterling has recovered strongly since its mid-January dip as gilts have gained and sentiment has improved somewhat.”

Sam Cornford – Head of Trading

USD

The dollar index is stabilising this morning, after dropping over 2% in a correction from its peak earlier this week. The main driver has been a contraction in the tariff risk premium, since Trump illustrated a willingness to negotiate rather than to ignite a trade war as an end in itself. A couple of data misses have helped to cool Treasury yields, too, with job openings falling back to 7.6M and the ISM services index underperforming the 54.0 estimate with a 52.8 print. On the topic of Treasury yields, Treasury Secretary Scott Bessent has said that he and Trump would focus on the 10-year yield on their quest for lower rates and not on coaxing the Fed, through a focus on non-inflationary growth and reduced borrowing. That supports the notion that Bessent could be an important check on Trump’s more extreme economic ideas, and some extra confidence that Fed independence will remain intact would be dollar positive at the margin. The data calendar is sparse today, with only jobless claims this afternoon. Without a fresh curveball from Trump – something we cannot rule out – the dollar is likely to settle until non-farm payrolls tomorrow.

GBP

The Bank of England is in focus for sterling today, which has cooled off slightly over the last day. The market is pricing in a clean 100% chance of a third rate cut after skipping in December, with the Bank sticking to a once-per-quarter pace. The question today is whether that is likely to be the cadence for 2025, too, or whether policymakers will be tempted to speed up in the face of the stagflationary risks. Alan Taylor suggested last month that some pre-emptive ‘insurance’ cuts might be a good idea to stave off the recent cyclical downturn, but few are expecting policymakers to give too much away today, just as other central banks have done in the face of considerable uncertainty in US economic policy. The press conference, the vote split – expected at 8-1 in favour of a cut – and the updated forecasts are what will move sterling, which may struggle to gain from a hawkish stance if it threatens again some difficult decisions for the Chancellor. Swati Dhingra voting for a 50bps rate cut is not an impossibility.

EUR

The euro has recovered well above 2% since the plunge in Asian trading on Sunday night and is consolidating this morning. The domestic data calendar is somewhat dry towards the end of this week, but we have had political developments in France, where PM Bayrou has managed to force through a budget and survive a no confidence vote. While the situation remains fragile, some resolution of uncertainty is a positive for the French economy. Meanwhile, the Trump administration is expected to propose plans to end the Ukraine war next week, which could be a boost to European FX if markets become optimistic that the conflict could end.

Markets

While some US big tech shares have suffered after slight disappointments on earnings over the past couple of weeks, overall indexes are remaining resilient and risk appetite is generally improving as tariff fears subside. Stocks rose across the board yesterday.

Main Economic Events (All Times CET)

8:00am: Sweden CPIF Inflation
1:00pm: Bank of England Policy Decision
2:30pm: US Unemployment Claims

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