ACM Update 24-03-25
We saw interest rates held firm by both the Federal Reserve and Bank of England last week. The respective heads of both central banks struck a cautious tone with regards to their ongoing monetary policy, awaiting any impact from the recent US tariffs.
There are plenty of UK events to come this week. The February CPI inflation reading arrives on Wednesday morning, forecast to show a modest drop, with Retail Sales for the same month published on Friday. Perhaps the “highlight” will be Rachel Reeves’ Spring Statement, delivered in Parliament on Wednesday lunchtime.
Despite a quieter week from Donald Trump, currency markets remained choppy, with movements of around one per cent for GBP versus the Euro and US Dollar. Central banks and monetary policy returned to the spotlight, albeit likely a temporary situation before the aforementioned President’s actions retake centre stage.
UK news was mainly focused on the Bank of England meeting last Wednesday lunchtime. Following on from last month’s rate cut, the bank had been expected to keep interest rates on hold this time, and they duly delivered. A vote split of 8-1 for a cut emerged, slightly more concrete than the 7-2 split expected. Swati Dhingra, having recently been reappointed to a second term on the rate-setting committee, maintained her usual dovish position as the sole vote for a cut.
Governor Andrew Bailey spoke after, maintaining that future rate cuts would come cautiously and gradually. He referenced the matter of Trump’s US tariffs, suggesting these and the retaliation from other countries, had been creating uncertainty. Inflation is thus very much back in the spotlight for the BoE, with Bailey and Co nervous about the potential impact of tariffs on international trade, and in turn price pressures.
The Bank’s committee are still expected to cut interest rates twice further this year, with a good chance of a cut coming at the next meeting in early May. GBP found some support on Thursday lunchtime off the back of the meeting, up by around 0.25% to the highest in a couple of weeks versus the Euro.
The latest Government borrowing figures piled more pressure onto Rachel Reeves, ahead of her Spring Statement next week. February saw borrowing exceeding estimates by over £3bn. Reeves is expected to reveal spending cuts this week, in order to hit her self-imposed “non-negotiable” economic rules.
The latest UK jobs data (January) saw unemployment remain at 4.4%. The pain arrived in the form of a much higher than expected increase in the claimant count, another negative for the Government. The Bank of England will have noted that average earnings data (wage growth) came down slightly to 5.8%, still well ahead of inflation. House prices remained buoyant according to Rightmove figures, displaying 1.1% growth this month.
Overall, a better week for GBP versus the Euro, but as shown in the chart below it was a rollercoaster versus the US Dollar:
Over in the US we also had an interest rate announcement, with the Federal Reserve leaving policy unchanged. After a lot of speculation over recent weeks regarding the state of the US economy, Fed Chair Powell struck a cautious but positive tone about the current state of play. For now, he considers the impact of tariffs to be “temporary” which is dangerously close to his transitory comments about inflation some four years ago. These proved to be far from the mark at the time, hopefully something he doesn’t live to regret again.
On the other hand, Powell did provide some mixed messages. He stressed that there is masses of uncertainty currently, as US Government foreign policy is difficult to predict, and in turn the impact on inflation. Comments were made about how the current uncertainty could well lead to a delay in interest rates coming down further, with the Fed in wait and see mode.
Powell also mentioned the word stagflation for the first time in a while. This is the concept of stagnant growth and sticky inflation. Whilst his comments were merely suggesting he sees no sign of this coming, the mere mention of the word shows that it is very much in the minds of the rate-setting committee.
The Fed also opted to downwardly revise their growth forecast for the year, from 2.1% to 1.7%. If fears about growth dropping off and inflation rising again materialise, then we could easily see a return to the central banker’s favourite buzzword.
February’s Retail Sales data for the US was also released, pointing to a monthly growth of 0.2%, far less than the 0.6% projected. To make matters worse, the previous month was revised down to -1.2%, indicating a change in consumer habits even before Trump launched his economic policies. This is an interesting insight into consumer spending and may well be assign of further weak data to come.
For now, the Dollar benefitted from the above in light of interest rates looking likely to remain higher for longer.
On the continent, the biggest cause for optimism was linked to the German economic position. The required two-thirds of lawmakers opted to vote in a massive increase in defence and infrastructure spending. The move is aimed at boosting the Eurozone’s largest economy, which has been in the doldrums for the last few years.
This change seems to have led to a far stronger outlook domestically. The most recent German ZEW economic sentiment data (measuring optimism/pessimism) was strong. It displayed the highest reading in three years, considerably up on recent months.
Christine Lagarde also spoke in front of the European Parliament on Thursday. The ECB President didn’t diverge from her recent stance of a data-dependent, meeting-by-meeting approach for Eurozone monetary policy.
The main useful takeaway was her suggestion that retaliatory EU tariffs and a weaker Euro exchange rate could lift inflation by around 0.5%. She also noted an ECB analysis, suggesting a US tariff of 25% on European imports would lower Eurozone growth by about 0.3% per annum.
The latest Final CPI reading meanwhile dropped slightly, now running at 2.3%. Overall, the Euro lost ground against the other two majors last week, mainly as a result of interest rates being held elsewhere. Movements on GBP-EUR can be seen in the chart below:
The week ahead:
Monday – FRA/GER/EU/UK/US Manufacturing & Services PMIs (08:15-13:45 UK time), Fed Bostic speech (17:45), BoE Bailey speech (18:00), Bank of Japan Meeting Minutes (23:50)
Tuesday – German IFO Business Climate (09:00), US Conference Board Consumer Confidence (14:00)
Wednesday – UK CPI inflation (07:00), UK Chancellor Reeves’ Spring Statement (12:30)
Thursday – BoE Dhingra speech (08:30), US Final GDP (12:30)
Friday – UK Retail Sales (07:00), US Core PCE Price Index (12:30)
A busy week for UK data-watchers then, with a number of events. Andrew Bailey speaks on Monday evening at an event hosted by the University of Leicester. Not a major event by any means, but any comments from the Bank of England Chief surrounding the ongoing rate path, would cause movement.
The latest round of UK inflation data for February is released on Wednesday morning. This is projected to show a slight drop from 3.0% to 2.9%, still running well above the BoE target of 2%. With a slight rise in energy bills coming in April, the Bank will be hoping for more of a drop than the forecast.
Chancellor Rachel Reeves makes her long-awaited Spring Statement on Wednesday lunchtime in the House of Commons. This is expected to deliver a whole host of spending cuts, in order to meet her self-imposed spending targets. Some have been mentioned already in a BBC interview over the weekend.
Another Bank of England policymaker, Swati Dhingra, will likely provide her usual hawkish tone in a speech on Thursday morning, before Retail Sales figures for February close out the week.
From the US, we have some big releases too. Consumer confidence data is projected to show a drop to its lowest since February 2021, highlighting the nerves flowing through the US economy. The Final GDP figure for Q4 of last year is expected to be confirmed as a 2.4% growth for the economy. Albeit this is pre-Trump 2.0 kicked off in 2025. Core PCE inflation, the Fed’s chosen measuring tool, arrives on Friday lunchtime.
For the Eurozone, not masses of events this week. We can expect a renewed sense of optimism though due to last week’s spending bill aimed at getting the German economy back on track.
Interest rates were definitely the main focal point last week. Central banks remain nervous about the impact of tariffs, with both the Bank of England and Federal Reserve cautious. The Bank of Japan meeting last week struck a similar tone too, with no change to policy and awaiting any potential shocks from Trump tariffs. The minutes from their meeting are also released this week.
On the subject of Trump tariffs, Canada’s recently appointed new Prime Minister, Mark Carney, called a snap election over the weekend, with polling on 28th April. Handling the US President will be a key manifesto topic, with former Bank of England Governor Carney hoping his economic background will sway voters.
As we race towards the end of Q1, conditions remain choppy with movements of around 1% for GBP versus most majors last week. Protecting budgets for the second quarter should be an important consideration, especially given the swings of 7% as an example of GBP-USD throughout Q1. Currency hedging is an important tool to do this, so make sure to get in touch with the Aston team for more information.
Have a great week.
