Currency Market update, who moves first on interest rates?

The Pound, Euro and Dollar have all been trading in narrow ranges over the last 2 weeks as investors continue to speculate on the likely path of interest rate cuts from the prospective central banks. With meetings scheduled in March for all 3 we will be scrutinizing the statements for hints as to the potential timing of these cuts.

The US Federal Reserve are currently odds on to be first with the release of the PCE price inflation this week matching estimates, which has fuelled hopes for a rate cut as soon as May.

The ECB are expected to be next as Eurozone inflation came down to 2.8% in January from a peak of 10.6% in October 2022 and is expected to drop further. Policymakers, including President Christine Lagarde, are keen to hang on for additional data, particularly regarding the labour market. With negotiated wage data from Q1, due in May, it makes June the most likely month to consider a first rate cut.

So that leaves the Bank of England as the last of the 3 to react supported by data this week showing mortgage approvals, surged in January to the highest since October 2022 and surpassing all expectations. Additionally, there was a greater-than-anticipated uptick in consumer lending in Feb.

The unexpected strength in PMI data from the previous week prompted investors to reconsider their predictions, with markets now considering the initial rate reduction might be postponed until August.

View from the desk

So what does all of this mean for exchange rates? In the short term it suggests the UK and US economies are showing greater resilience than the Eurozone so it is worth keeping a look out for a breaks to the downside for EUR/GBP and EUR/USD. If interest rates are due to stay higher for longer within the UK this could provide a yield advantage in favour of the pound so we would be looking out for spikes on GBPUSD too. All 3 central banks are expected to cut rates to a similar extent in the longer term so any advantage is likely to be temporary hence we would be keen to take advantage of any modest opportunities that present themselves.

With the ECB set to meet on 7th March and the US Federal Reserve and Bank of England meetings set for 21st and 22nd March respectively we could well be in for a more volatile month than February has proved. Therefore, now is the time to start speaking to a currency expert to lay out your requirements and aspirations to ensure you do not miss out on any positive price action. At the same time, they will help you manage your risk to ensure you avoid any nasty surprises if the markets take an unexpected turn.