March Currency Market update, Interest rate speculation still front and centre
Central Bank's - Report from March meetings
In our last update, we discussed the timing of interest rate cuts from the Eurozone, US, and UK and the potential impact on the respective currencies. During March we heard from all 3 central banks, so what did we learn and how has this affected our outlook?
The European Central Bank (ECB) went first, keeping interest rates on hold during their March meeting and doing their best to dampen expectations of a streak of rate cuts during 2024. June is still the most likely month for the cuts to begin with markets divided on whether we will see 3 or maybe 4 rate cuts during the rest of the year. This would leave their interest rates somewhere between 3.5-3.75%.
Next we heard from the US Fed and again, it was little surprise to learn they kept rates on hold, however, they appear to be a little more divided than before. Investors are still penciling in a rate cut as soon as May but Federal Reserve members have since contradicted each other as to what may follow with some suggesting nothing more and others suggesting the need for 2 or 3 cuts during the year. This introduces uncertainty to the market and may explain why the Dollar has seen some erratic movements during March. It means, come the year's end, interest rates in the US could be anywhere from 4.5-5.25%, a broad range for the market to try and price in.
Finally, we heard from the Bank of England (BoE) that again, kept rates on hold but acknowledged that the market’s view of two or three rate cuts this year is not ‘unreasonable.’ The central bank also said that inflation is moving in the right direction, following the softer-than-expected reading for February. This has led to investors starting to bring forward the expectation of the first-rate cut from August to June. Again, looking towards the end of the year it would leave interest rates in the UK somewhere around 4.5%.
So what impact did this have on exchange rates?
The pound, Euro, and Dollar are all within a hair's breadth of where they were this time last month, however, this does not tell the whole story.
During March we saw both the Pound and Euro briefly gain almost 2 cents against the Dollar and even EUR/GBP has seen a range of 0.85-0.86 (more than 1%). With expectations the BoE will cut rates sooner, it has eroded the chances of an increasing yield advantage even for a short time against the Euro which has softened up the Pound and reduced the chances of a break lower for EUR/GBP.
If the ECB continues to try and prepare the market for a higher landing point for rates then this could well favour the Euro. The US Dollar is certainly looking the most vulnerable right now with the uncertainty fuelling volatility. This could create a repeat of the price spikes we have seen recently for both the Pound and Euro.
Ultimately we still have to keep in mind that interest rates will be cut everywhere, and the timing if within a month of each other is unlikely to lead to a lasting decisive move for now.
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