Sovereign International Daily Market Report
Bank of England cuts rates as doves get the last laugh.
The Bank of England lowered rates for the first time since the onset of the pandemic on Thursday, although the committee hinted that future hikes could be gradual.
Highlights:
As was mostly anticipated by market participants, the MPC cut its policy rate by 25 basis points to 5.0%. The vote on rates was far from unanimous, however, with the doves carrying the day in a razor-thin 5-4 split decision. According to the statement, the decision was ‘finely balanced’ for some, with members wary of cutting rates too fast and too deep. The pound was little moved, as markets brace for a relatively gradual pace of cuts ahead.
Earlier on Wednesday, both the Bank of Japan and Federal Reserve delivered their latest policy announcements. The BoJ unveiled a surprise 15 basis point hike, much larger than had been priced in, while saying that it would begin gradually dialling back its asset purchases. This was enough to trigger another bout of yen strength, with the USD/JPY pair moving back below the 150 level.
The Fed held rates steady, meanwhile, but firmly hinted at a cut at its next meeting in September. Attention today will be squarely on this afternoon’s US nonfarm payrolls report.
USD
The fed funds rate was held at a range between 5.25-5.50% in a unanimous vote on Wednesday, although the FOMC’s statement was subject to a handful of dovish tweaks. In it, the Fed noted that there had been ‘some’ further progress towards the 2% inflation goal, having said in June that ‘modest’ progress had been made. Meanwhile, policymakers are now ‘attentive’ to risks on both sides of the dual mandate, rather than merely emphasising inflation risks, with inflation seen as ‘somewhat elevated’, a downgrade from ‘elevated’. Chair Powell’s press conference was even more dovish than we had anticipated. He said that it was ‘coming to be time’ that the Fed adjusts rates, while saying that a September rate reduction could be on the table.
We think that a September rate cut from the Fed is effectively set in stone following this week’s announcement. The main question now surrounds the pace of easing beyond the September meeting. Market participants have viewed Powell’s remarks as an indication that the Fed could cut rates at every meeting during the remainder of the year. Our base case remains for just two cuts in September and December, although the heavy emphasis placed by the Fed on the labour market suggests that this is not guaranteed. Today’s NFP report will take on added importance, with economists eyeing a modest easing in both net job creation and annual wage growth.
EUR
Macroeconomic news has been broadly supportive of the euro so far this week, with both the latest GDP and inflation figures surprising to the upside. Euro Area inflation rose back up to 2.6% in July, according to this week’s preliminary figures, while the core rate unexpectedly remained unchanged at 2.9% (2.8% consensus), albeit in part due to temporary factors, namely a rise in core goods inflation. This could provide a little bit of a headache for ECB officials ahead of the September Governing Council meeting. We don’t think that it will be enough to derail another cut, but there could be an element of dissent among the hawks that may advocate for greater patience.
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There will be no major economic data out of the Euro Area today, so we expect the euro to take its cue from today’s US payrolls number. We are entering into a somewhat quieter period in markets in general as peak summer approaches, and we could see EUR/USD trade in relatively tight ranges next week.
GBP
We’ve seen a move lower in GBP this morning, perhaps in a belated reaction to Thursday’s Bank of England policy announcement, which was dovish relative to market pricing. In line with our expectations, and as outlined in our BoE August meeting preview report, members Breeden, Lombardelli, Ramsden and Governor Bailey joined the existing doves (Ramsden and Dhingra) in opting for a cut, while fellow policymakers Pill, Greene, Mann and Haskel voted for no change. According to the MPC, the decision on rates was once again ‘finely balanced’ for some, but clearly members have seen enough progress on inflation to warrant looser policy.
A cut was only around 60% priced in by markets prior to yesterday’s announcement, which is likely behind the delayed sell-off in sterling this morning. The statement, however, made clear that future cuts will be gradual, warning that rates would not be cut ‘too quickly or by too much’. We believe that the Bank of England is positioning the market for additional cuts at every other MPC meeting, with the next one to follow in November, when the next Monetary Policy Report and press conference are scheduled.
Economic Calendar – 02.08.2024
Friday – 02.08:
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