Markets fade amount of rate cuts priced in

Market reports
Thanim Islam
  • Underlying theme of too many rate cuts priced in
  • GBP continues to benefit in current market environment
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There seems to be a growing theme of an unwinding of the amount of rate cuts expected by central banks, following a combination of central bank speakers and economic data. Fed Waller got the ball rolling on Tuesday suggesting a cautious approach to cutting rates, ECB Knot and Lagarde reiterated the same yesterday, and a combination of higher UK inflation and higher US retail sales caused money markets to ease their expectations for rate cuts. GBP benefitted off the back of this across the G10, as well as USD. But we note, given how much USD weakened following an increase in rate cut odds, we feel that it will be the greenback that will benefit the most should there be a continued reduction in cutting odds.

Another thing worth mentioning that has been attributed to the recent gains for USD, as well as weakness on the EUR, has been the recent wins for Donald Trump in the Iowa caucuses. Trump's stance on withdrawing aid for Ukraine is being a negative for EUR, and imposing tariffs is currently being seen as positive for USD. Very early but still worth considering for future needs and planning.


Market rates

* Daily move - against G10 rates at 7:30am, 18.01.24

** Indicative rates - interbank rates at 7:30am, 18.01.24

Table (51)

Data points

Table (52)


  • USD – Fed Bostic

Our thoughts

Markets are bit more settled this morning following volatile trading over the last two sessions. The risk-off moves that we saw earlier on Wednesday eased late in the New York session, seeing equities recover initial losses and USD pulled back after making earlier gains. Quiet day today with only US jobless claims and Fed Bostic speaking, and we expect FX pairs to remain in their respective ranges. GBP continues to be favoured in the current market, particularly GBPEUR, and should we see an uplift in December's retail sales numbers tomorrow then it would be hard to deny the markets' desire to push GBP higher. GBPUSD however seems likely to remain in its recent trading range whilst the broader, overarching USD trend tries to find direction.

Chart of the day

The amount of rate cuts expected by the Fed and BoE has reduced over the last few days causing USD to gain. However it's worth nothing that the differential in rate cuts remains steady between the UK and US, and thus it seems we could well see GBPUSD stay within its 2 cents trading range in the near to medium-term.

18012024 cotd
Source: Bloomberg Finance L.P.

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