Analysts further temper rate cut predictions

Macro Commentary

US inflation dominated the headlines this week, with the headline number rising by a higher than expected 3.5%, pushing yields to new recent highs. With the economy continuing to strongly outperform, traders are now only forecasting two rate cuts this year, the first pushed back to September.

In the UK, it has been a relatively quiet week with little in the way of economic data as markets continue to speculate on the timing and scale of Bank of England rate cuts. Economists have now trimmed back forecasts to a cumulative 0.50% of cuts this year, with further easing expected through 2025.

A busy data calendar for the UK next week, including inflation, jobs, and retail sales, is likely to increase short-term volatility.

The European Central Bank kept monetary policy on hold at this week’s meeting as widely expected, with analysts forecasting they will act more aggressively on rate cuts than their peers, with an initial cut priced for June and around 0.75% of cumulative cuts this year.

Market momentum continues to be driven by the outlook for interest rate differentials, and of course increasing geopolitical tensions, which remain a dominating factor for investor sentiment.  

On the exchanges, GBP/USD has dropped to year-to-date lows towards the significant 1.2500 level as the market reprices US rate cuts. GBP/EUR remains within a tight range around the 1.1700 level.

GBP/USD – 1-year chart

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*Bloomberg survey / Not available

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