The Bank of England (BoE) cut rates by 25 basis points, as was widely expected. GBP fell as markets viewed the BoE's dovish stance, noting 7 members supported a 25bp cut, with 2 unexpectedly favouring a 50bp cut, and the growth forecast was slashed to 0.75%. In an effort to project confidence, the bank signalled its vigilance over inflation risks, suggesting just two more rate cuts on the horizon. However, market analysts are anticipating a more aggressive approach, forecasting three additional cuts that could lower the base rate to 3.75% by year-end.
Some of the GBP losses were given up by the end of the day after Governor Bailey cautioned markets against reading too much into the members' vote, highlighting that more attention should be on the minutes from the meeting.
USD gained back some of the previous day's losses with treasury yields climbing back but gains were limited following a higher than expected initial jobless claims number.
*Daily move - against G10 rates at 7:30am, 07.02.25
** Indicative rates - interbank rates at 7:30am, 07.02.25
Overnight, US Treasury Secretary Scott Bessant commented that he favours a strong USD and has no plans to alter the Government's debt-issuance plans. We also had some hawkish comments from Federal Reserve (Fed) member Lorie Logan who indicated that interest rates may already be at a neutral level, potentially negating the need for further cuts if inflation continues to cool. As a result, USD starts the day strong.
Today, all eyes are on stateside job numbers where we are expecting 170,000 job additions for January. It is however, worth noting, that January tends to be affected by seasonal phenomenon, such as the weather, and this year, also likely by the LA wildfires. Another key focus today is the annual payroll number revisions. If these figures are significantly adjusted downward, we might witness the USD facing pressure as the week concludes.
Also to note today is the European Central Bank’s (ECB) publication of its neutral rate report. If today's report reveals an elevated neutral rate, it could signal that ECB rates might not decrease as much as the market anticipates. ECB member Schnabel thinks that the rate should be between 2% and 3%. Similarly, Olli Rehn indicated a range where the midpoint sits at 2.50%. Current rate in Europe is 2.75% but markets are pricing rates to fall to 1.75% by the end of the year. So even if the neutral rate is projected at 2% we could see a stronger EUR today.
Here in the UK, we will be hearing from BoE member Huw Pill with markets listening out for any echoes of yesterday's BoE meeting.
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