Markets temper rate cut predictions

Macro Commentary

A mixed set of data for the UK this week, with inflation steady at a lower than expected 4%, whilst the jobs market remains surprisingly resilient, particularly pay growth, which increased by 6.2% excluding bonuses. The economy moved into a technical recession, shrinking 0.3% in the last quarter of 2023 as higher interest rates took their toll, though most economists think the worst is behind us.

Although households are enjoying a return of real spending power, this set of data only adds to the dilemma facing the Bank of England. The market has reduced rate cut forecasts to a cumulative 0.75% for this year, starting in August. Inflation looks set to ease further in the coming months, towards the 2% target, with wage growth also expected to moderate significantly.

In the US, inflation came in at a stronger than expected 3.1%, pushing yields higher and driving a strong sell-off in equities. The underlying strength of the US economy further adds to doubts over the timing and pace of US rate cuts. The Fed is currently priced to cut by 1% this year, down from 1.50% at the turn of the year.

The European central bank looks set to be first to begin a rate-cutting cycle, perhaps as early as April, which continues to weigh on the Euro, as the bloc’s economic outlook remains incredibly challenging.

On the exchanges, dollar strength is driving the dynamic on the outperforming US economy, with sterling easing following this week’s data. The Euro remains on the back foot driven by weak economic fundamentals and the outlook for interest rate differentials, pushing GBP/EUR to year-to-date highs.

GBP/USD – 1-year chart

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*Bloomberg survey / Not available

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