RedFX Update: Decisions, decisions – what just happened?
As mentioned in previous updates, it is the TIMING of rate cuts that will affect currency movements through 2023 and 2024, and it looks like that divergence is now happening. After 3 key interest rate decisions & statements this week, major moves and trends are now in place.
USD: Weaker, raising EUR/USD to 1.0900 levels and GBP/USD to 1.2725 - the USD index is at 4month lows.
Wednesday saw the US Federal Reserve leave rates unchanged but with a dovish stance, indicating that they plan to cut rates 3 times in 2024. This confirmed the market’s way of thinking, but still caused the USD to weaken considerably. Markets are predicting with 80% certainty that rates will remain unchanged at the January meeting, but pricing 3 0.25% cuts in 2024, serving to weaken the USD.. In short:
“Markets disregarded all the remarks on the possibility of more hikes when needed and the freedom the Fed gives itself to react any way it sees fit to get inflation down to 2%. All that mattered was that the dot plot projections showed a consensus of interest-rate cuts in 2024.”
GBP: Stronger, forcing GBP/USD back to recent highs.
Thursday saw The Bank of England keep its benchmark rate unchanged at 5.25%. The vote split was 6 in favour of a hold and 3 members voting for a 25 basis-point hike – indicating that a cut in interest rates was not on the agenda. Governor Bailey warned that measures of inflation persistence are higher in the UK economy than in other major advanced economies.
Rabobank is even suggesting GBP/USD could hit 1.3000 by year-end 2024.
EURO: Stronger, propelling EUR/USD higher and preventing GBP/EUR climbing beyond 1.1620
Thursday saw the ECB leave rates unchanged at 4% but take a hawkish stance, saying that rate cuts had NOT been discussed at all – in fact, ECB's Lagarde surprised markets by telling markets that rate cuts are not foreseen during 2024. For those who want to see rate cuts, the glimmer of hope was that inflation forecasts were trimmed by a few points, but this was entirely overshadowed by Lagarde’s comments.