GBP and EUR both benefitted as Governor Bailey and President Lagarde pushed back against rate cut expectations, and expressed their desire to keep interest rates at current levels and restrictive for a ‘sufficient long duration’. Bailey added that it was too early to speculate on rate cuts too soon, but respects that markets have their own view. Lagarde was a bit more blunt about objection to rate cuts by stating “We did not, did not discuss rate cuts at all, no discussion, no debate on this issue”. The stance of both the BoE and ECB stood in stark contrast from the Fed, and to no surprise we saw GBPUSD and EURUSD hit near four-month highs.
In the middle of the BoE and ECB meeting, there was an attempt by USD to claw back losses after retails sales and initial jobless claims came in better-than-expected, illustrating the resilience of the US economy, but with rates still in focus, rate differentials took precedence.
* Daily move - against G10 rates at 7:30am, 15.12.23
** Indicative rates - interbank rates at 7:30am, 15.12.23
With the clear divergence on monetary policy between the Fed, ECB, and BoE, it seems safe to say that USD could well continue to weaken going into year-end, unless of course there is any data along the way that counters the respective central bank view – for example next week's inflation numbers from Europe and the UK could have dovish implications on rate outlooks for next year. To finish the week, we’re back to economic performance with PMI numbers for December. Looking at the data points above, there is an expectation for activity to have improved in the UK and Europe, and a slight underperformance from the US. Should the numbers come in line then we could well see further gains for GBPUSD and EURUSD.
So after all the central bank meetings this week, we need to look at the net result on rate differentials for next year. The impact of a dovish Fed has caused rate differentials to favour both GBP and EUR, driving both currencies to fresh four-month highs versus USD. With rate cuts now firmly in the markets' sight, focus will now fall on which central bank pulls the trigger first to start cutting rates next year.
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