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BoE and ECB more hawkish than Fed, GBP and EUR

Good morning

In stark contrast to the Fed, the Bank of England made it clear they see risks to inflation are still to the upside and they are ready to tighten further if necessary. To support his hawkish view, three of the members, Mann, Haskel and Greene, voted for a rate rise. BoEs Bailey said it was far too early to be talking of rate cuts, even though the market is pricing in a full 1% of cuts through 2024, beginning as soon as May.

The ECB also tried to push back on rate cut speculation, Lagarde noting that ECB did not discuss rate cuts at all at their meeting. I find that very difficult to believe given the market pricing of a cut as soon as March 2024 and given ECB lowered their 2024 inflation forecast from 3.2% to 2.7%.

Following the BoE and ECB announcements, both GBP and EUR made further gains against USD through the afternoon, with GBPUSD rising as high as 1.2790 and EURUSD to 1.1000. They held most of those gains overnight but as I started writing they have both dropped, GBPUSD now 1.2750, EURUSD 1.0960, perhaps the disappointing German and EU PMI numbers released this morning have reminded people that despite the talk being more hawkish than the Fed, the economy both here and in EU is on pretty rocky ground. Or maybe the market to decide they have perhaps overdone this dollar selling and that a 400+ point move in GBPUSD and a 300+ point move in EURUSD since mid-Nov is a little rich.

GBPEUR is up to 1.1635 as EUR sell-off is marginally heavier than that of GBP for the time being, maybe due to EU PMIs already released but still waiting on the UK versions.

So, it is now very clear that 2024 will bring a lot of rate cut talk, the threat is that cuts come later and slower than the market is pricing in although the market does have a knack of being more accurate than central banks. Remember when we were all being told inflation was transitory and that higher rates were unlikely to be needed! I find it mildly impossible that US will cut rates while UK and EU keep theirs elevated for any great length of time, while the longer UK and ECB rates are kept high, the sharper they are likely to fall.

I tried hard to get to grips with the GCHQ Chistmas puzzles yesterday but have to confess I struggled immensely. After I’d pretty much nailed it last year I was hoping for better, but the old ‘past performance is not indicative of future results’ came to haunt me. What made things worse is that my daughter, who I have to confess is vastly more academic than me, was pretty quick to answer some of the questions although I do think she had some help. Anyway so far I’ve not looked at the answers and still have plenty to struggle through.

We’ve had a lot of dismal news this year and certainly plenty over the past couple of months, so it is with pleasure I can say the news item that got my attention this morning was that of the 17 year old lad who went missing in 2017 but has now been found in southern France after having walked for four days through mountainous terrain from some sort of commune in an attempt to get back to his Grandmother in the UK.

Have a great weekend, get the final bits of shopping done so we can all begin to slow down towards the end of next week. Well that’s the plan anyway, whether it works or not is another matter.

- 09.00 EU HCOB manufacturing, services PMI

- 09.30 UK S&P manufacturing, services PMI

- 10.00 BoEs Ramsden speaks

- 13.30 US empire state manufacturing index

- 14.15 US industrial production

- 14.45 US S&P manufacturing, services PMI

- 17.25 BoCs Macklem speaks

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