By Nick Harrison
Yesterday, The European Central bank, headed by President Christine Lagarde, cut its main deposit rate by 25 basis points to 3.5%. Investors had pretty much priced this move in, so apart from a minor dip in the GBP/EUR when the rate was announced, the market did not see any big moves and steadied itself to the remain at the highest range we have seen for two years.
As is always the case, The ECB President came out to deliver a statement half an hour after the rate decision. Her rhetoric though was very much a sit on the fence type of sentiment as she talked about the outlook for further monetary policy in the Eurozone. She said that the ECB were “… looking at a battery of indicators..” to establish how their stance on rate decisions would be for the longer term. Quarterly projections in the Eurozone showed that growth would be slightly lower than expected for the rest of this year, with inflation only returning to a more sustainable target in in the second half of 2025.
Just to clarify – higher inflation gives cause for central banks to raise their interest rates, so as to curb higher costs, whereas lower growth and inflation means the central banks will likely cut their rate to stimulate their economy. Across the Eurozone, UK & US, we have seen high interest rates for some time now, so recent cuts by the ECB and Bank Of England have attracted high attention from investors. A higher interest rate gives more yield appeal for investors which is why we can sometimes see some volatility in the FX market when the central banks announce their interest rate decisions.
Elsewhere, inflation data was released in the US on Wednesday afternoon with the month-on-month Core Consumer Price Index figure showing a slight increase of 0.1%. The core CPI figure is the change in the price of goods and services purchased by consumers, excluding food and energy. This figure excludes food and energy as, despite being responsible for a quarter of the CPI, their prices can be quite volatile which can distort the main trend. The US Federal Reserve therefore views the figure as the more important of the inflation releases, so this will have given them further food for thought ahead of their interest rate decision next week.
Economic data peters out this Friday so the FX market will be bracing itself for the interest rate announcements by the Bank Of England and the US Federal Reserve next week. Both committees will be reviewing the job market, inflation and the wider economic performances of their countries as they mull over how to adjust their monetary policies to deliver growth. The US is widely expected to cut their rate for the first time since July 2023 and early indications are that the cut will be 25 basis points. Anything more could well weaken the USD against the Pound and Euro, so this will surely be a very interesting data release. The US vote happens on Wednesday evening, so watch out for any volatility in the market on Thursday morning.
In the UK, the first of two more 25 basis point cuts is expected next week with the second cut happening in December. As always, the vote will be announced by the Monetary Policy Committee and it is worth noting that last time around the vote was very close, coming in at 5 to 4, so it is likely that investors will react off that back of this. 5 of the MPC members voted to cut the rate by 25 basis points last month, whereas 4 members voted to keep the rate on hold.
Outside of the interest rate decisions, there is plenty more for investors to digest next week, so it could well be a bumpy ride in the FX market. Do make sure you speak to your Currency Consultant here at A Place in the Sun Currency and we will help you make informed decisions about how to manage your FX risk. See below for next week’s major data releases.
TUESDAY
US Core & Retail Sales – 1.30pm
WEDNESDAY
UK CPI (Inflation) – 7am
US FOMC interest rate decision – 7pm
US FOMC Press Conference – 7.30pm
THURSDAY
UK Bank Of England Interest rate – Midday
US Unemployment claims – 1.30pm
FRIDAY
UK Retail Sales – 7am