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  • richard evans

Dovish Fed sends USD lower, will BoE and ECB follow suit?

Good morning

Well there was me thinking that Powell would err on the less dovish side. Fed did leave rates unchanged but we got a pretty dovish message from the Fed and USD has weakened as a result. The ‘dot-plot’ showed two additional rate cuts expected through 2024 which would leave rates at 4.6% by the end of next year, this is down from 5.1% last time. This is still behind market thinking which suggests a rate of 4% by end of next year, but the message is rate cuts are on the horizon and could be seen as early as March 2024.

Powell is pleased with lower inflation coming without higher unemployment, the possibility of a further rise in rates was not taken fully off the table, however the talk at the meeting was of rate cuts rather than rate rises and Powell has expressed willingness to ensure Fed do not wait any longer than necessary before they begin to lower rates.

Goldmans have brought forward their forecast of the first US rate cut from Q3 2024 to Q1 2024 and see cuts in March, May and June, each of 25bps. Barclays and JPMorgan don’t see a cut until June 2024 but, unless we see a huge change in incoming data, an earlier cut is looking far more likely, as is the chance of cuts of 1% or more next year.

USD weakness has been seen across the board. GBPUSD rallied from 1.2510 to hit 1.2650 overnight, EURUSD pushed up from 1.0785 to 1.0915, while USDJPY saw a dramatic shift lower from 145.20 to 141.00, breaking below the recent lows. The USD has regained a part of these losses, GBPUSD, EURUSD and USDJPY now 1.2635, 1.0900 and 141.85 as I type.

The key question now of course is whether BoE and ECB follow a similar dovish path at their rate meetings today. Of the two, BoE is least likely to be in a position to cut rates although the recent disappointing GDP number will no doubt have set alarm bells ringing. We’re still likely to see a couple of members voting for further rate rises, indeed the vote split could be crucial for GBP. Last time, three members voted for a rate rise. If those members were to vote for no change this time, it could signal more chance of an earlier cut. We’d surely need to see inflation lower before BoE talk of rate cuts although I did see James Cleverly interviewed the other day where he said ‘this is why we are bringing down interest rates’, I’m not sure if this was a slip or just inaccurate.

I’m not sure if this is a reflection of poor sales, but it would seem the boxing day sales are being brought forward now. I was looking at presents for my kids (yes I’m aware I should have done this already), and see sales have already started at shops like Ralph Lauren and Gant. Unfortunately not on the stuff I was thinking about buying, but with black friday sales only just out of the way, shops seem to be going the way of the furniture stores with never-ending sales. They wouldn’t be doing this if sales were strong. While I’m looking more at UK sales, we do have US retail sales numbers out this afternoon which I’ll watch with interest.

For the ECB, they have already erred on the more dovish side, not yet ready to cut rates but with inflation in the Eurozone falling Lagarde will have a job on her hands to convince markets a rate cut in early 2024 isn’t likely. ECB likely to lower their inflation and GDP forecasts today and there must be a chance Lagarde talks of earlier cuts, although she will have to be careful that she doesn’t come across as too dovish or EUR could really suffer. For now though, EUR is looking OK, with EURUSD at around 1.0900 and GBPEUR back below 1.1600.

BoJ also have a rate meeting early next week. There had been a lot of talk about Japan moving away from negative rates but I do wonder whether, with Fed looking like cutting next year, Japan may be reluctant to begin pushing their rates higher. I can imagine them getting them wanting to got out of zero territory to zero, but if Fed, BoE and ECB are all cutting rates, it would be odd for Japan to choose this time to start raising rates.

So, it’s all about interest rates for now and as we move into 2024 we should be talking about when and by how much rates could fall. Sounds like good news although one hopes this doesn’t come with slower economies and the dreaded recessions that we seem to have staved off in 2023.

Could be a busy day ahead but I’ve noticed that the annual GCHQ Christmas challenge has been released. They say it is their hardest yet, which doesn’t bode well, but I’ll give it a go. I think its aimed for kids, but more importantly it is best attempted with a group of people rather than one. Still, I’ll give it a go. You can download it at the GCHQ website. They’re probably watching to see how we get on!

- 08.30 SNB rate announcement

- 09.00 Norges Bank rate announcement

- 09.00 SNB press conference

- 09.30 Norgs Bank press conference

- 12.00 BoE rate announcement

- 13.15 ECB rate announcement

- 13.30 US retail sales, initial jobless claims

- 13.45 ECB press conference

- 21.30 NZ business PMI

- 00.01 UK GfK consumer confidence

- 02.00 China retail sales, industrial production

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