Back To The Central Bankers

BoE to cut, Bailey's communication key

The Bank of England is widely expected to cut rates by 25bp today, bringing the policy rate to 4.75%. Most expect the vote count to prove 8-1 in favour of a cut, although Sterling could quite easily receive a temporary boost if the vote is 7-2 or 6-3. More impactful for Sterling, however, should be Governor Andrew Bailey's press conference. He's likely to be asked how stimulative he finds last week's UK budget. Recall that the budget helped the market re-price the BoE easing cycle higher by some 25bp - and traders think the market's pricing of the BoE lending rate at above 4.00% next year is too high.

That means GBP/EUR could drop back to the €1.1947 area. Medium term, however, markets increasingly expect GBP/EUR to prove a €1.2195 story as the fall-out of trade wars weighs more heavily on the Euro than the Pound.

Data: Bank of England Interest Rate Decision 12:00

Collapse of the German government says it all

This week, Carsten Brzeski has highlighted the collapse of the German government, with a key sticking point being disagreements over fiscal stimulus and suspending the German debt brake. This situation underscores the European economy's challenges, already strained by weak domestic demand and the threat of a trade war. As Carsten notes, the formation of a new German government by March could actually increase the likelihood of fiscal stimulus, potentially better positioning Europe to counter Trump's trade policies in 2025.

EUR/USD found support just below $1.0700 yesterday, following a sharp 2.3% intraday drop—steeper than expected, even compared to FX options market predictions. While some profit-taking on EUR/USD shorts may lift the pair toward the $1.0800 range, traders expect it to largely stay in the lower half of its $1.0550-$1.1150 range for the remainder of the year. Trump's recent election win could have a notable impact on European investment intentions, a concern previously highlighted by the IMF due to the prospect of higher tariffs.

Data: Retail Sales 10:00

Back to fundamentals for the Dollar

Betting markets currently give the Republicans a 93% chance of winning the House and therefore a clean sweep. Global financial markets reacted to the prospect of Donald Trump having carte blanche to pursue his policy agenda by: buying the Dollar, re-pricing the Fed easing cycle higher, selling (especially longer-dated) US Treasuries, buying US equities and punishing those likely to be on the receiving end of his trade policies, such as BMW who's shares were marked down 7% yesterday. As discussed below, however, some EM currencies had been sold heavily in advance and market positioning meant they did not see a further leg lower. Indeed, the Brazilian Real rally was helped by a 50bp rate hike.

The challenge for investors is how to position now. The US election event risk has passed with a surprisingly clean outcome, but Trump's policy agenda will not emerge until 2025, and perhaps not even until late in 2025. Before then, however, the market will be subject to his social media posts and presumably his choice for top posts in his administration, such as the next US Treasury Secretary.

That is all for the future. Today very much presents a return to the state of the domestic economy and how central bankers will respond. The overriding position currently is one in which the disinflation process is true and restrictive interest rates are no longer required. That should be the core story from today's FOMC meeting, where the market fully prices a 25bp rate cut. Traders doubt Chair Jay Powell is ready to endorse the market's less dovish re-pricing of the Fed's easing cycle by saying prospective Republican policy is inflationary. It would be a bullish Dollar surprise if he did.

Data: Federal Reserve Interest Rate Decision 19:00