Dovish BoE sends GBP lower

Good morning

Three of the nine BoE officials voted to cut rates yesterday, not enough to win so rates are held at 4.75%, but enough to offer more of a dovish sentiment than the market was expecting.   GBP duly dropped, GBPUSD which had been up around 1.2650 fell initially to 1.2585, only to then be given another push lower as USD strengthened after a stronger than expected US GDP release.  Ramsden and Taylor joined Dhingra in calling for a rate cut.

BoE are still concerned about upside inflation risks but they are now equally concerned about weak demand going forward that could upset the economy and push unemployment higher.  The recent budget is also likely to hamper growth, with GDP forecasts for the final quarter of 2024 cut from 0.3% to 0%.  Bailey gave no real clues as to the rate path for 2025, but market pricing of three 25bps cuts seems reasonable for now, starting with a possible 25bps cut in February. 

Disappointing UK retail sales numbers this morning have helped GBP move even lower.  GBPUSD fell further to 1.2475 overnight, while GBP crosses also shifted lower.  GBPEUR traded lower from a high yesterday around 1.2160 to current levels around 1.2035, while against AUD, NZD and CAD we’ve seen GBP drop to 2.0025, 2.2165 and 1.7980 from highs yesterday of 2.0300, 2.2400 and 1.8230 respectively.  Quite an impact. 

USDJPY continued its march higher, trading up to almost 158.00 overnight, however higher than expected inflation numbers from Japan, plus some carefully worded comments from Japanese FinMin Kato and top currency diplomat Mimura  about ‘sudden, one-sided FX moves’, saw Yen regain some its losses, USDJPY now 156.90.  A BoJ rate rise in March still looks more likely than January.

Spurs beat Man Utd to claim the last of the league cup semi-final places.  Spurs were 3-0 up but of course had to make life difficult and Man Utd fought back strongly late on, leaving the final score at 4-3.  Never a dull moment with Spurs.  This weekend brings premier league action, the highlight is likely to be Spurs v Liverpool, obviously I’ll not be expecting too much from that.

This weekend we have boxing as Tyson Fury once again takes on world champion Usyk on Saturday night.  Could be quite a thrilling bout and certainly one to stay up for.

We’ve had the key data this week and certainly plenty of volatility.  US core PCE this afternoon could create one final blast of USD movement, surely after that we can begin to wind down for the holiday period?

-  13.30 US Core PCE, personal income/spending

-  13.30 CAD retail sales

-  15.00 US Michigan sentiment survey

-  15.00 EU consumer confidence

FOMC cut but hawkish tilt send USD higher, stocks lower. BoE next up....

Good morning

The Fed did indeed cut rates 25bps to 4.5% as widely expected but the US dollar did push higher and US equities slumped as the interest rate projections, or the dot plot, suggested higher rates than previously forecast through 2025, 2026 and beyond.   Just over 50bps of cuts are now forecast for 2025, down from over 1%, indeed now we are looking at total cuts of just 1% to end 2026.  The repricing saw USD shift higher with EURUSD trading down to 1.0345 and GBPUSD to 1.2560. 

Powell sounded hawkish when he spoke, saying the economy and policy were in a very good place, while the Fed don’t think the unemployment rate will rise further.  Powell said the rate decision was a close one, with Hammack actually voting to keep rates unchanged.  Fed have now lowered rates by a full 1% from their peak and Powell has made it clear they will be more cautious with regards to further cuts. 

USD is brushing off reports that we could see a government shutdown as soon as Saturday after Trump said he opposed a stopgap funding bill but perhaps the sharp move lower in US equities reflects that risk more.  Historically I don’t believe US government shutdowns, as frightening as they sound, have negatively impacted USD to any great extent.  I have no doubt someone will prove me wrong on this but that’s my gut feel.

Overnight BoJ kept rates unchanged again as widely expected, USDJPY which had already gained after the FOMC made further gains, lifting up to 156.60 this morning, coming from lows below 151.00 just a week or so ago.  One member, Tamura, did vote to raise rates by 50bps.  Overall the economy is in line with expectations but BoJ did make it clear they are expecting inflation to rise and as such I think the Jan BoJ meeting is one to watch.  For now though, Yen weakness is the key.

NZ GDP overnight very much disappointed, coming is considerably lower than expected with a hefty downward revision to the previous months data as well.  No surprise that NZD fell on the report, GBPNZD traded up to 2.2400, over 300 points off yesterday morning levels, while NZDUSD was hit be a combination of the stronger USD and weaker NZD, reaching a low around 0.5610.  The Oct 2022 low around 0.5510 is in sight. Expect more rate cuts at the Feb RBNZ meeting, although if I am not mistaken RBNZ have previously said they are not confined to scheduled meetings to cut rates.  Perhaps they’ll act before Feb.   

AUD failed to make significant gains against NZD, the pair traded up to 1.1075 but after the NZD data and a higher than forecast Aussie inflation expectation number overnight, RBA still on hold and RBNZ on track to cut rates further I’d have thought it the pair could break higher.  Currently 1.1055, AUD weakness is more pronounced against GBP with GBPAUD now 2.0225, while AUDUSD dipped below 0.6200, now 0.6245.

Arsenal,  Newcastle and Liverpool all made it through to the semi-final of the league cup, the remaining place in the last four will be decided tonight as Spurs take on Man Utd.  Putting Spurs recent victory over a fairly poor Southampton to one side, I find it very difficult to be confident that Spurs have any chance in this match

Next up in BoE who are widely expected to keep rates on hold at 4.75%.  Dhingra, always dovish, is expected to be the only member to vote for a rate cut.  It will be interesting to see if anyone else follows suit, but 8-1 is the expected vote.  Even if Dhingra changes her view and votes for no change it is unlikely to cause any significant moves.  BoEs Bailey has previously suggested we could see a full 1% rate cut through 2025, we’ll be watching for any confirmation of whether this is still a likely scenario. 

After the BoE we will have US GDP along with some other reasonably key US data.  Early tomorrow morning we’ll have UK retail sales and then more US data including the core PCE deflator, one of the Feds favourite indicators. I’m still looking forward to winding down but we can’t quite do this just yet. 

Have a great day

-  12.00 BoE rate announcement

-  13.30 US GDP, PCE, philly fed survey, initial jobless claims

-  21.45 NZ trade balance

-  23.30 Japan CPI

-  01.15 PBoC rate announcement

-  07.00 UK retail sales

No great surprises from UK inflation this morning, focus now on FOMC

Good morning

US retail sales yesterday looked good, the headline coming in above expectations although taking vehicles out of the equation the number was actually a bit on the disappointing side.  This, together with weaker than hoped industrial production numbers, helped keep the US dollar under pressure although it is fair to say moves were pretty contained, EURUSD traded just ten pips or so either side of 1.0500 for much of the afternoon. 

GBP, having been supported by employment numbers early yesterday morning, held its gains and indeed made ground against most majors, GBPUSD was up at 1.2720 and GBPEUR tested the 1.2110 level several times through the day.  GBP also gained against the likes of AUD, NZD and CAD, those crosses trading at 2.0055, 2.2075 and 1.8205 respectively, the latter given a boost by lower than expected Canadian inflation.

This morning GBP lost some ground after the release of the latest UK inflation data.  CPI, RPI and PPI were all pretty much in line with expectations, core CPI was actually a touch softer previous PPI readings were revised a little lower.  GBPUSD had been 1.2710 before the announcement, it did tick higher to 1.2720 initially but has since lost ground to 1.2685.  GBPEUR is off its highs, now 1.2090. Overall, the data is not enough to suggest we’ll see anything other than unchanged rates at tomorrows BoE meeting. 

The FOMC rate announcement this evening is certainly the main event today.  A 25bps cut is widely expected and certainly should be almost fully priced in.  Focus will be on Powell’s comments in the statement as well as the updated forecasts from Fed officials, including the dot plot which gives an indication of where they think rates will be going forward.

The NZ Treasury half-year economic update suggests there is another 1.5% of cuts to come from RBNZ by the end of 2026.  We could well see some volatility overnight as well, with NZ GDP and Aussie inflation expectations each with potential to move markets.  NZ GDP is expected to be weak, but any weaker and the door is open for a third consecutive rate cut of 50bps at the next RBNZ meeting in Feb.  Meanwhile we know RBA are still on the hawkish side, at the moment there is some question as to whether we are likely to see a rate cut from RBA in Feb or May.  Numbers out tonight won’t decide that but the market will certainly factor it in. 

AUD and NZD are weak at the moment.  AUDUSD is 0.6310, lowest level for over a year, NZDUSD is 0.5730, the lowest for over two years.  Against GBP they have both been at multi year lows, GBPAUD has been up to 2.0125, the highest since April 2020, GBPNZD to 2.1550, the highest since June 2016.  Both crosses are off those highs after the UK inflation numbers but are still at historically elevated levels.  

The BoJ rate announcement is in the early hours of tomorrow morning, the timing is always a bit vague, a bit like staying up for a big boxing match only to find it doesn’t really start for another couple of hours.  Anyway, there had been talk a while back of a possible rate rise but that has been hugely downplayed recently and no change is expected at this meeting.  Any talk from BoJ of a Jan rise could see a stronger yen but I can see this meeting coming and going with little fuss.  For the record USDJPY is currently 153.60, GBPJPY 194.80.

League Cup quarter finals begin this evening, three matches taking place, while Spurs will take on Man Utd tomorrow.  My money is on Arsenal, Newcastle and Liverpool all to get through.

On the subject of football, I watched the last episode of Ted Lasso yesterday evening.  All three series were pretty good, bar a couple of what I would regard as filler episodes.  It wasn’t quite the tear jerking ending I had been led to believe it would be but there was plenty of the feel-good stuff that has been the main ingredient for much of the show.  There are suggestions that we could see a season four at some stage.  Until then I’m looking for a new box set to get into in the New Year.  Suggestions on a postcard please.  Or do I just watch Game of Thrones again?

It’s a bit stormy here with some reasonable gusts of wind so take it easy if you’re heading out. 

Have a great day

-  09.00 ECBS Nagel speaks

-  10.00 EU HICP

-  13.30 US building permits, housing starts

-  14.00 SNB quarterly bulletin

-  19.00 FOMC rate announcement

-  19.30 FOMC press conference

-  20.00 NZ Westpac consumer survey

-  21.45 NZ GDP

-  00.00 AUS consumer inflation expectations

-  01.30 AUS economic outlook

-  03.00 BoJ rate announcement

-  04.00 BoJ press conference