Treasury Market Commentary –

Analysts eye slower BoE rate reductions

A weekly economic update from our Treasury team.

Published

19th January 2024

Category

Macro Commentary

Mixed UK data this week with headline inflation unexpectedly ticking up to 4.0%, whilst average earnings growth slowed to 6.5%. Inflationary pressures have eased considerably, and the downward trend is expected to resume in the months ahead. The jobs market, meanwhile, remains relatively robust given the economic headwinds, with unemployment steady at 4.2%.

Markets have scaled back expectations for UK rate cuts, with around 1% of cuts currently forecast by year end.

European headline inflation printed 2.9% as expected, with markets pricing in up to 1.40% of rate cuts as the underlying economic fundamentals remain extremely weak.

In the US, forecasters continue to price in up to 1.50% of rate cuts this year, potentially starting in March, as the Fed switches its focus from inflation to growth.

Although the outlook for interest rate differentials remains a key driver of market sentiment, central bank policymakers have been pushing back on the markets aggressive pricing for rate cuts on the unprecedented uncertainty, which is weighing on global equity markets and nudging yields higher.

Geopolitics remains at the forefront of investors’ minds on the growing risks of escalation as tensions continue to rise. Chinese growth data continues to disappoint, weighing on the European economy in particular, and the authorities seem likely to add further economic stimulus.

Little in the way of data next week, with no change expected at the European Central Bank meeting, so political events will likely drive momentum.

GBP/USD – 1-year chart

Graph GBP Currency Last Price 1 year chart

Week Ahead

Date

Release

Last

Expected*

24/1/24

UK S&P Services PMI

53.4

n/a

24/1/24

UK S&P Composite PMI

52.1

n/a

25/1/24

EU ECB Main Refinancing Rate

4.50%

4.50%

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.2675

USD/JPY

148.25

GBP/EUR

1.1655

AUD/USD

0.6575

EUR/USD

1.0875

USD/CHF

0.8685

GBP/AED

4.6550

XAU/USD

2027

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7459

-3.55%

S&P

4780

+0.23%

EUROSTOXX

4453

-1.51%

Central Bank Key Deposit Rates

BOE

FED

ECB

5.25%

5.25%

4.00%

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+4.22%

5-year

+3.67%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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