Slow Start To Big Central Bank Week

GBP consolidates around $1.2730 ahead of eventful week

GBP

The Pound Sterling (GBP) struggles for a decisive move in Monday’s European session as investors stay on the sidelines ahead of the interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE), which will be announced on Wednesday and Thursday, respectively.

Investors see the BoE leaving interest rates unchanged at 5.25% as inflation is much higher than the desired rate of 2%. Market participants will keenly focus on the guidance for interest rates, namely clues about how long the BoE will keep interest rates high. The BoE needs to make a balancing act between high inflation and uncertainty over economic growth. The UK economy was in a technical recession in the second half of 2023, reporting contraction in the last two quarters. The nation grew by 0.2% in January but this is insufficient to confirm that the economy has returned to growth in the first quarter as a whole.

No Major Data

Plenty of action for the Euro

EUR

EUR/USD will be primarily driven by US events this week, although there are some inputs from the Eurozone calendar that should not be overlooked. Final February CPI figures this morning should not surprise, but tomorrow’s ZEW survey will be interesting to check the state of the struggling German economy. As will PMIs on Thursday, which could potentially offer some direction to EUR/USD into the weekend after the FOMC has been digested. There are also plenty of European Central Bank speakers to hear from, including President Christine Lagarde on Wednesday. ING Bank has the view EUR/USD can trade on the soft side into the FOMC, but could still end the week within the $1.0850/1.0900 range.

Data:

10.00: Harmonized Index of Consumer Prices

No fireworks from the Fed

USD

The Fed meeting on Thursday is the most important event of the week, ING Bank's view is that the policy message will not substantially diverge from Chair Jerome Powell’s Congress testimony earlier in March. The FOMC should remain cautiously optimistic on disinflation and rate cuts later this year, although the release of the Dot Plot projections will force policymakers to offer some clearer guidance on the size of the easing package – something Powell may attempt to avoid, instead opting to emphasise data dependency. There are currently three 25bp rate cuts in the median 2024 Dot Plot, but projections are so dispersed that it would only take two FOMC members changing their “dot” to take the median to two or four rate cuts this year. The short-term reaction in the Dollar should be primarily driven by projections on rates and other macro indicators. It is expected to be an unchanged Dot Plot but admit that a hawkish revision looks more likely than a dovish one.

Where does this leave the Dollar? Potential Dot Plots adjustments point to some upside risks for USD, but cautious optimism on disinflation points to a softer USD. Ultimately, the Fed may not provide enough reasons for investors to diverge materially from the 75bp of easing priced in by year-end, and the predominance of a data-dependent view may very simply delay any larger Dollar and broader FX moves to the first half of April when key US figures for March are released.

No Major Data