26/07/2024
Written by: Ian Morley
Summary
The USD and Treasury yields experienced widespread gains after cautious remarks from Fed Waller, who suggested the possibility of interest rate cuts this year if inflation fails to rebound. GBPUSD and EURUSD briefly touched previous support levels before a modest recovery. The likelihood of a March rate cut by the Fed decreased from 72% to 60%.
Our Analysis
Surprising upward movement in UK inflation led to a revision in the expected rate cuts by the BoE this year, reducing from 130bps to 115bps. GBP strengthened across the board, driven by CPI at 4%, core CPI at 5.1%, and services CPI at 6.4%. Some analysts view this as a temporary blip, projecting inflation to ease back to 2%. Short-term support for GBP is expected, but a risk-off environment could pose a threat to gains.
ECB members continue to resist market expectations on interest rate cuts. ECB Knot cautioned that markets might be overly optimistic, while Lagarde acknowledged a potential rate cut by summer, aligning with a market probability of 90% for April.
US retail sales take centre stage this afternoon, with expectations of steady resilience. A higher retail sales figure is crucial for sustaining USD gains and potentially diminishing the likelihood of a March rate cut.
News of the Day
An unexpected rise in UK inflation prompted a GBP gain, leading to a reduction in anticipated BoE rate cuts. Analysts attribute the inflation spike to a significant increase in airfare prices, considering it a temporary deviation from the BoE’s 2% target. Market expectations still lean towards a 0.25% interest rate cut in May, with a probability of 68%.