Higher for longer
The message that most central banks have been trying to push throughout their hiking cycles has been to expect rates to rise and remain elevated. It is the ultimate level of rates more than the speed at which they rise that determines how the economy receives monetary tightening. At least in the case of the UK, the Eurozone and the US, the job of breaking new ground with higher rates appears to be done. Only a few months ago, the Federal Reserve was still forecasting a final hike in December. With the Fed’s latest decision due tomorrow, that possibility has been all but been extinguished from market pricing and expectations.
With rates still in enormously restrictive territory, the job for central banks will be to convince the market that these levels are likely to stick around for longer. The reason that central banks would wish to do so whereas the wider market would not is to support the path of inflation back towards its target. If markets price in rate cuts prematurely that represents a real effective monetary loosening for the underlying economy. Everything from FX contracts to mortgages are based upon the market pricing of credit, not overnight rates from the central bank. Central banks will therefore be cautious that not striking a tone strict enough to scare markets into pricing a pause in rates at this lofty level could undermine progress made on inflation.
This week’s decisions by the ECB and Bank of England that will follow one day after the Fed’s publication come at a difficult time to support such narratives. There has been a significant repricing of the short end of the interest rate curves behind GBP, EUR and USD. This has already led to a material easing for financial conditions despite no change at the central bank level. It would be one thing to support stable rate expectations, but it is another entirely to reverse a trend currently well underway. So far markets expect a more aggressive but delayed start to rate cuts in the UK versus the Eurozone. Should that pricing change, a challenge to GBPEUR spot levels would ensue.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Gold and Silver
Humphrey Percy
Wed 4 Feb 2026
Gold and Silver Due to the vertiginous moves in both these precious metals all markets are more than usually fixated on the price action at present. Yesterday, both steadied and clawed back some of the recent losses with Gold rising almost 6% and Silver 10% to USD 4921, and USD 86.70 respectively at the time […]
Daily Brief – Gold
Humphrey Percy
Mon 2 Mar 2026
Gold With Spot Gold at USD 5392, Friday saw not one but two US banks break cover and forecast that the price would reach USD 6000 by year end 2026. Indeed, JP Morgan has predicted it will reach USD 6300 a further 20% lurch up from here. Apart from Central Bank buying, the most cited […]
Daily Brief – US Markets
Humphrey Percy
Mon 23 Feb 2026
US Markets As we settled into the weekend USD was enjoying a fourth day of strengthening, US GDP came in at 1.4% instead of the 3% expected by analysts and US inflation at 2.4% all added up to just a normal Friday in US markets. Then the Supreme Court decision came in deeming POTUS’ tariffs […]
