We just closed an unusually quiet two weeks in markets. There were few headlines, macroeconomic news or policy announcements that would change market perceptions on economic or monetary policy, and the quiet in foreign exchange markets reflected that. There was more action in bond markets, as traders continue to push back their timing for interest rate cuts, and risk assets, with key stock indices worldwide hitting record highs. This week we expect volatility to return to FX markets. Two key events will focus traders’ attention. On Thursday, the ECB’s March Meeting may clarify the Council’s expected timetable on interest rate cuts, after weeks of conflicting messages from voting members and a worldwide repricing towards later and fewer cuts from the world’s key central banks. On Friday, the US labour report will provide timely information on both the state of the US economy and the pace of wage increases, which will drive the outlook for the Federal Reserve’s March meeting later this month.



There was little data out last week that would change the fundamental view that the UK economy is proving more resilient than expected, and that the Bank of England will be in no rush to cut rates, certainly not before the ECB does so. While the UK economy entered a technical recession in the second half of last year, not only was it an incredibly mild one, but one that may prove short-lived, at least if the latest business activity PMI numbers are anything to go by. This week’s Spring budget announcement (Wednesday) could include additional fiscal stimulus as the Tory Party attempts to woo voters ahead of the impending general election. Chancellor Jeremy Hunt may deliver either a cut to income taxes or National Insurance. There has also been speculation of an abolishment to inheritance tax, which we would view as a Hail Mary attempt to close the vast deficit in the polls. If confirmed, these measures would likely be marginally positive for sterling.



A raft of less dismal-than-expected economic news, and mostly hawkish communications from ECB council members, has led markets to almost price out any chance of an April cut fully in rates and push the expected timing for the first move to June. Last week’s inflation number was a bit higher than expected, though not massively so, while Citigroup’s Economic Surprise Index for the Eurozone is now sitting pretty at its highest level since April. The February inflation number, the absence of timely information on wage increases and the better-than-expected economic data all suggest that the European Central Bank will not push too hard against this view. Indeed, we expect Lagarde to largely reiterate her communications from the previous meeting, with attention to be mostly on the bank’s updated economic projections. This outcome should be moderately supportive of the common currency.



While January’s PCE inflation report last week did not add much information to the earlier CPI one, the trend in inflation surprises seems to be to the upside. Together with the absence of any serious signs of a slowdown in the US labour market, this seems to preclude Federal Reserve cuts any time soon, with the first-rate reduction now not fully priced in until July. This view will be tested on Friday when the February payrolls report is released. In our view, the most critical number will be the average monthly wage increase. This number has been considerably stronger than expected, and the running three-month average is currently sitting at around a 6% annualised rate. We think that the Fed’s ability to cut interest rates will be constrained until we see a significant moderation here.