Gobal rate-cut hopes decline as vaccine boosts markets
As another vaccine hits the market, which can be stored at a less cold temperature, hopes of a global economic return to normal make a comeback. Although most clearly felt and announced in stock-market rises, expectations of interest rate cuts in the world’s large economies are fading.
Markets were pricing up to 0.25% rate cuts in most leading economies by mid-2021, but Pfizer and Moderna’s vaccines have changed that in only a week. Reuters report shows:
USA: From no change to 0.5% headline rate by Sep23 (previously expecting 0.25%)
EU: Already at -0.5%, a 0.9% cut was expected by Sep21, now a cut of just 0.5% expected
UK: 0.15% cuts expected before Aug21, now just 0.05% of cuts expected
AUD: 0.6% cuts expected, now just 0.2% of cuts expected through 2021
GBP: With Bank of England Chief Haldane announcing that 2021’s economic outlook would be “materially brighter”, GBP maintained high levels through the day (GBP/EUR trading 1.1150 & GBP/USD trading 1.3250)
This morning saw better than expected UK Inflation figures, as Covid-19 continued to push up prices of goods sold in the UK. A 0.7% rise versus an expected 0.5% rise in September was a surprise to the market. This boosted GBP versus USD and EUR, but the annual rate is well below the Central Bank target of 2%.
BREXIT: EU negotiators will update the EU bloc’s envoys on Friday – all eyes will be on key announcements following continued rumours of ‘optimism’.
There were rumours this morning that France is understood to have accepted that it’s fishing rights would be ‘reduced’ in a post-Brexit environment – if correct, it brings a Brexit deal & optimism much closer to reality.
USD: Continued weakening against all majors, with poor Retail Sales on Tuesday, and Covid-19 restrictions being re-implemented in some states. The market is clearly worried about the long-term effects of the current rise in US Covid-19 infections, with US 10y Treasury yields falling, dragging the USD.
AUD: The up-beat reaction to global vaccines began to fade and hurt AUD overnight, as new regional confinement measures were announced.
Central Bank Governor Lowe praised the continued bond-buying program, whilst emphasising the “need” for a strong trading relationship with China. He also called negative rates “incredibly unlikely” but might be possible if globally co-ordinated – by leaving the door open, he capped any AUD gains.
The relative ‘state’ of Covid-19 in Europe and the USA will dictate EUR/USD rate in the medium-term, but at the moment, the EUR pushes higher, trading at 1.1850, and all eyes will be on the crucial 1.1915 level next.