The world’s major central banks are inching closer to cutting rates, as the fight against inflation makes steady progress. While the ECB hinted at a June cut, without entirely ruling out an April move, the soft-ish labour market report out of the US helped make the case for a similar calendar for the Federal Reserve, while the UK’s stickier inflation means Bank of England cuts will be delayed. Last week’s currency performance reflected the week’s news, with the dollar falling against every G10 currency and sterling outperforming the euro. However, the big winner for the week was the Japanese yen, up sharply on hints that the Bank of Japan will finally start hiking rates, potentially as early as this month.

 

This week will be critical for the narrative that inflation is under control and central banks are ready to start lowering rates, as we get the all-important CPI inflation report for February in the US on Tuesday. The key number will be the monthly core subindex, stripping out volatile food and energy items. The data calendar is quiet in the Eurozone, but in the UK the labour report for February Tuesday will be followed by the January monthly GDP print the next day, so the week could be a volatile one for the pound.

 

GBP

The Spring budget did not surprise markets last week, as the tax stimulus in it was modest and had been largely priced in by markets. As anticipated, National Insurance was cut by 2p to 8%, the windfall tax on oil and gas producers was extended, while there was no change in the Income Tax thresholds. The latest growth forecasts from the OBR were also upped through 2026, in line with the generally more upbeat UK economic news that we’ve seen so far this year.

More important will be the labour data and the monthly GDP number to be released this week. The labour market will continue to show full employment with wage gains above 6%, while the economy is expected to have returned to growth in January. These will be key input to the Bank of England meeting next week. As things stand now, markets are not pricing in a full chance of a cut until August, a relatively hawkish stance that is providing solid support for sterling.

 

EUR

Last week’s European Central Bank meeting left the distinct impression in markets that cuts are coming soon, not at the next meeting in April, but the one after that in June. President Lagarde said that discussions had not yet been had on lower rates, although the bank did revise lower its inflation projections, with Lagarde explicitly noting that the bank would have more information by the time of its June meeting.

The gleams of good news in recent economic data support a later cut: the PMIs are off their lows, though still stagnant. On the back of strong tourism receipts, particularly from US visitors, France, Spain and Italy are outperforming expectations, compensating for very weak German manufacturing. A large gap in economic performance, however, remains across the Atlantic and we think that the euro rally may be short-lived.

 

USD

The US labour market report came out on the weak side on Friday. While the February job creation number stayed strong, there was a sharp downward revision to the January print that more than offset any optimism. The unemployment rate unexpectedly jumped by 0.2 p.p (to still very low levels) and, crucially, monthly wage increases were underwhelming, bringing the three month average to just under 4% in annualised terms – the monthly increase in wages was the slowest in two years.

This report validates the Fed’s narrative that the disinflation trend remains in place, the economy is not reheating and some monetary tightening can be unwound, most likely starting in June. While the dollar suffered as a result, the moves were relatively modest as interest differentials with the rest of G10 countries did not change much – central bank easing is also expected in every other major economy, save Japan.