Tapering
As the week has progressed and today’s ECB decision moves into focus, European rates have been tapering in on the 25-basis point cut consensus scenario. Less than a 5% chance of an outsized 50-basis point cut remained priced into overnight rates as of market open this morning. This adjustment will limit any potential Euro selling at 13:15 GMT today if the ECB confirms the most likely policy outcome. However, at the same time the tapering of market implied rate expectations as this week has progressed will exacerbate any potential reaction to a half-point cut which should not be ruled out.
As a cut in line with consensus is far more likely, any potential EUR selling pressure would be likely to enter the market if a dovish commentary is provided during the press conference. Commencing at 13:45, Lagarde’s presentation of the monetary policy decision could leave longer term yields vulnerable, inviting potential value destruction within the Euro. The impact within EURUSD could be all the more significant given that the longer duration portion of the US yield curve remains well supported following evidence of sustained inflationary pressure within yesterday’s CPI report.
Playing piggy in the middle, US PPI will be published at 13:30 today between the publication of ECB’s rate decision and press conference. PPI is closely watched as alongside CPI inflation it provides a near-perfect proxy for what the Fed’s preferred PCE deflator release will look like. A 0.2% month-on-month (MoM) publication today should be consistent with a 0.2% MoM reading of the PCE data next week. This could relieve some embarrassment from the Fed and pave the way to a December cut still despite strong CPI readings.
Discussion and Analysis by Charles Porter
Great British Pound After a lacklustre reaction to the UK interest rate cut on Thursday and a more visceral one to the much less rosy Bank of England economic forecasts, GBP staged a recovery at the end of the week. However over the weekend a series of less than optimistic commentary on the BoE, the […]
Bank of England As expected the BoE cut interest rates by 25bps yesterday. So far so good but then the BoE departed from the script. Flat economic growth up until the end of 2024 was less of a surprise but then a new forecast for inflation +3.7% and 2025 economic growth slashed from 1.5% to […]
Not another headline Markets have either grown complacent or are reading beyond Trump’s headline statements. Over the past week markets have been presented with the challenge of fresh tariffs on China with retaliatory tariffs on the US also due to come into force in just under a week. In addition to that they have the […]