March 22, 2024

“Central bank week has lit a fire under the FX markets over the past few days as volatile swings first dented and then rocketed the US dollar. Dovish comments from the Bank of England Governor has ground sterling to a one-month low this morning, while further strong economic data has handed opposite fortunes to the dollar.”

Tim Hallinan – Trading Director

Main Headlines

LatAm central banks in Mexico and Brazil both cut interest rates yesterday. The Bank of Mexico kicked off its cutting cycle with a 25bps easing from 11.25% to 11.00% in a 4-1 decision, emphasising its data-dependent stance for the meetings ahead, while the Banco Central do Brasil slashed rates by 50bps for the sixth consecutive meeting to 10.75%.

British retail sales unexpectedly remained steady in February despite adverse weather affecting in-store purchases, as reported by the Office for National Statistics on Friday. These figures further indicate a recovery from the mild recession experienced last year. The ONS indicated that retail sales volumes remained flat, lingering 1.3% below pre-COVID-19 pandemic levels from 2020.

GBP

Sterling has slipped to a one-month low this morning as the Bank of England takes its next steps towards cutting rates. Yesterday’s policy decision came with an unchanged statement, and so it was the change in the vote split that catalysed a 1+% slide in the pound. The downside inflation surprises this quarter have pushed the remaining hawks to throw in the towel – the 6 for a hold, 2 for a hike, and 1 for a cut vote from February turned into 8 for a hold and 1 for a cut. This morning, however, it is an FT exclusive interview with Governor Bailey that has caused a stir, after he commented that rate cuts are now ‘in play’ at future meetings and strongly played down the fundamental pillars of the pounds strength: namely, concerns about inflationary persistence and sticky wage growth. On a positive note, however, the UK PMIs ticked down to 52.9 yesterday but continued to show evidence of an activity rebound this year, something that was bolstered by flat retail sales this morning despite estimates for a 0.4% contraction in February.

EUR

A resurgent dollar has pushed EUR/USD to a three-week low this morning, having slipped 1.2% from the peak of the rally following the Fed’s dovish hold on Wednesday. The eurozone PMI composite index inched ever closer towards expansion at 49.9 and reinforced the improving outlook across the continent, although further weakness in the German manufacturing figure plumbed it to a five-month low in spite of the brighter investor confidence prints this week. In terms of the ECB’s rate path however, the data likely does little to pile pressure on kickstarting rate cuts, and US rates are really dominating the euro’s movements this week. The diary today includes the German ifo Business Climate survey and a speech from German ECB official Nagel.

USD

The markets have put the Fed’s dovish hold behind them, and the dollar has surged to a one-month high this morning amid a string of robust economic data as well as weakness in Japan, the UK, and Switzerland. All of yesterday afternoon’s data came in strong: the PMIs again signalled robust growth, jobless claims landed lower than expected, existing home sales jumped by almost 10%, and the CB leading index hopped into positive territory for the first time in two years. Dollar optimism has truly been the driving narrative in the second half of the week, particularly as yields slip elsewhere, despite Fed Chair Powell’s de-emphasis of the economic activity data only two days ago. This looks to be the story of today too, and investors will be keen to take in a fresh Powell speech this afternoon for new clues.

Markets

The UK’s FTSE 100 has shot up to an almost one-year high this morning as hopes grow for an earlier-than-expected interest rate cut from the Bank of England following a dovish vote split yesterday and some optimistic language from Governor Bailey. US and EU stocks stalled and drifted sideways meanwhile, while Japan’s Nikkei surged to a fresh high.

Main Economic Events (All Times CET)

1:01am: UK GfK Consumer Confidence
8:00am: UK Retail Sales m/m
10:00am: German ifo Business Climate
1:30pm: Canadian Retail Sales m/m
2:00pm: Fed Chair Powell speaks
5:00pm: Fed’s Barr speaks
9:00pm: Fed’s Bostic speaks

To learn more about Ballinger Group, please visit our website or our LinkedIn page.