March 21, 2024

“The deluge of central bank decisions continues today after the Federal Reserve generated some heavy 1% swings across markets yesterday with a staunchly dovish attitude. The Swiss National Bank has caused some fresh volatility this morning with a surprise cut that has sent the franc plummeting. Let’s see if the Bank of England can do the same this afternoon.”

Sam Cornford – Head of Trading

Main Headlines

Irish PMI Leo Varadkar unexpectedly announced his decision to step down yesterday, citing his belief that new leadership would boost the chances of re-election for the coalition government. Varadkar’s Fine Gael party is set to initiate the nomination process for a new leader on Thursday, with the outcome expected to be disclosed on April 5. Parliament will then convene to vote on the new prime minister’s succession following the Easter recess on April 9.

Britain recorded a larger-than-expected budget deficit in February, driven by increased spending on cost-of-living payments and the impact of previous inflation on public finances, according to official data released on Thursday. The public sector net borrowing, excluding state-owned banks, stood at £8.4bn last month, compared to £11.8bn recorded a year earlier.

GBP

Sterling has inched lower ahead of the Bank of England decision this afternoon, after jumping 0.6% in yesterday’s session against a weaker dollar. To recap on the CPI print from yesterday morning, the headline figure fell slightly more than expected to 3.4% but, with services inflation still running at 6.1% and a 0.6% monthly increase, painted an overall neutral picture for the pound. This sets the Bank of England up for a likely unchanged policy statement later today, as concerns about underlying price pressures and inflationary persistence put policymakers on hold as they await further data. If that is the case, the biggest source of price action could then come from the vote split. Back in January, 6 voted for a hold, 2 for a hike, and 1 for a cut – cooling wage growth and headline inflation could very well tilt one or both of the hikers towards a hold and dent the pound, while an unchanged outcome would likely be sterling positive. We also get some PMI activity data this morning and retail sales figures early tomorrow, which rebounded in January but are set to contract again in February.

EUR

The euro has handed back around half of its Fed-induced gains this morning as activity data disappoints and a surprise Swiss National Bank cut has sent ripples across European FX. The PMIs are the biggest source of domestic price action this morning, where we have had some weaker data in both France and Germany ahead of the consolidated figure that could slash hopes for a bottoming out trend in the eurozone growth outlook. This could begin to add an even greater sense of urgency to the ECB when it begins to discuss seriously the prospect of dialling back restrictive in May or June, and at the very least it will weaken their cushion of economic safety that they have relied upon to stay patient. In another event putting pressure on the ECB to begin cutting, in Switzerland the SNB has unexpectedly kicked off the G10 cutting cycle by lowering its rate from 1.75% to 1.5%, sending the franc plummeting nearly 1% as policymakers slashed forecasts for inflation over the next few years.

USD

Weakness across the G10 has lent some support to the dollar index this morning after the Federal Reserve sent it crashing by 1% following yesterday’s decision. The key point to note from the event is that there is a clear bias developing for the Fed to begin cutting in the summer and to craft an elusive soft landing this policy cycle. The infamous dot plot maintained the three-cut hypothesis for next year despite projections for higher growth, higher inflation, and lower unemployment, as Powell cited ‘seasonal problems’ with the hotter-than-expected inflation prints over the past few months that have left the Fed’s confidence undeterred. He also mentioned in the press conference that strong employment data would not delay policy easing. This asymmetric reaction function ultimately dampens the impact of hawkish surprises in the US data over the coming months, and leaves the dollar at risk if any surprises bolster the dovish case. On today’s calendar, the flash services and manufacturing PMIs should cool slightly but remain strong, while jobless claims should continue their strong sideways trend.

Markets

The Fed’s dovish stance last night generated positive conditions for risk assets globally, pushing the major US equity indexes up by around 1% each and triggering a rally in Treasury bonds across much of the curve. Europe’s STOXX 600 ended unchanged, however, as gains were offset by a sharp drop in Gucci-owner Kering. Gold also reached a fresh high as the opportunity cost of holding the non-yielding assets decreased slightly.

Main Economic Events (All Times CET)

9:30am: Swiss National Bank Policy Assessment
10:00am: Eurozone PMIs
10:30am: UK PMIs
1:00pm: Bank of England Monetary Policy Summary
1:30pm: US Unemployment Claims
2:45pm: US PMIs
3:00pm: US Existing Home Sales

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