March 25, 2024

“The FX markets saw some big swings in last week’s blockbuster central bank calendar. With most of the major currencies – except the yen – now on a path towards rate cuts, policymaker rhetoric is set to take on increased importance this week as markets build up for the headline core PCE print on Friday.”

Sam Cornford – Head of Trading

Main Headlines

US Treasury Secretary Janet Yellen announced over the weekend that the $1.2 trillion government funding bill passed by Congress includes provisions allowing the US to extend up to $21 billion in loans to an International Monetary Fund (IMF) trust aimed at assisting the world’s poorest nations. This would cement the US’ position as a primary support of the Poverty Reduction and Growth Trust (PRGT), which offers zero-interest rate loans to low-income countries.

British Chancellor Jeremy Hunt announced on Sunday that Britain’s ruling Conservative Party would pledge to maintain the ‘triple lock’ system for increasing state pensions, aiming to appeal to older voters ahead of an anticipated election later this year. The triple lock system currently ensures that publicly funded pensions are increased by the highest of earnings growth, inflation, or 2.5%.

GBP

Sterling has paused this morning after a sharp decline triggered by a dovish tilt from the Bank of England late last week. The departure of the hawks from the vote split at Thursday’s meeting and Governor Bailey’s remarkably optimistic view on incoming rate cuts in the FT on Friday took a 1.5% chunk out of the pound’s strength all told, and sterling will rely on some more hawkish commentary this week to stage a comeback. One of the last people to vote for a hike in February – Catherine Mann – speaks this afternoon. She is still likely to strike a firm tone, but the reasoning behind her shift in thinking should give some stronger clues on the views bouncing around the committee. CBI realised sales data this morning will also give a view on the retailing and wholesaling industries, after retail sales on Friday defied pessimistic expectations to remain stable in February.

EUR

The euro slipped 0.8% last week against a resurgent dollar, in a week where the Fed and the BoE took centre stage. The German ifo Business Climate beat expectations on Friday, despite worsening activity indicators, but this did little to dent the downwards trend. This week, inflation is the big topic once again in the eurozone – the Spanish print comes on Wednesday and the French and Italian figures land on Friday, and naturally this should give a decent picture for next week’s German and bloc-wide figures. There is still a lingering possibility of an April ECB cut, but we will likely need to see a strong step towards the 2% target in this data for this to become a real possibility.

USD

The Fed’s unchanged rate projections and some dovish commentary from Chair Powell failed to pin the dollar down last week. The market-implied probability for a June cut leapt from 55% to 75%, but it ultimately turned out to be the least dovish central bank – at least according to the market – and a broad expectation that it was one of the least likely to cut in the near term rocketed the greenback to a second consecutive weekly gain. The Fed’s favourite gauge of price growth – the core PCE index – is the headline this week but it arrives on a day where the markets are closed, and so we will not see the FX impact until early on Monday. With many questions left unanswered last week, price action is more likely to be dominated by policymaker speeches, including Waller on Wednesday and Powell on Friday. We will be looking for some answers on the seasonal factors that made them play down the recent hot CPI prints, and for some more clues as to why the Fed is so biased towards cutting rates without the data moving in their direction.

Markets

Stock indexes globally have generally steadily drifted lower from all-time highs over the past few sessions as traders await some fresh catalysts, after jumping midway through the week on bolstered expectations for rate cuts this year. Last week, the European STOXX 600 notched its ninth consecutive weekly gain, while the S&P 500 posted its 18^th gain in the last 21 weeks.

Main Economic Events (All Times CET)

12:00pm: UK CBI Realised Sales
1:25pm: Fed’s Bostic speaks
3:00pm: US New Home Sales
3:15pm: BoE’s Mann speaks

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