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FX Viewpoint : The Fed, ECB, and BoE: Rate cuts on the horizon…

5 Feb 2024

Key takeaways

  • The Fed, ECB, and BoE started 2024 by keeping interest

    rates unchanged, but set the stage for rate cuts

  • Our economists expect the Fed and ECB to start easing in

    June, followed by the BoE in August

  • The USD is likely to strengthen modestly against the EUR

    and GBP over the medium term, in our view

The Fed is unlikely to deliver its first rate cut in March

The Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) all kept rates steady at their first policy meetings in 2024 (Chart 1), as widely expected. While they set the stage for rate cuts later this year, there were some differences in tone. The Fed is looking to see if the last six months of good inflation data will continue, while signalling that an interest rate cut in March is unlikely (see USD: Fed Chair Powell talks down the prospect of a March cut for details). Our economists still expect the first Fed rate cut in June.

The ECB’s pushback against market rate cut expectations was not that forceful

The ECB stated that there was “broad consensus” that it was premature to discuss policy rate cuts at the January meeting; but there is no doubt it is moving toward them. ECB President Christine Lagarde pushed back a bit against market expectations, noting that policymakers wanted to wait for more data and be further along the disinflation process; however, it was not a particularly forceful pushback. In our economists’ view, April is a ‘live’ meeting, while June is the more likely time for the first ECB cut.

The BoE is still looking for more evidence before rates can be cut

The BoE’s guidance dropped references to further tightening, but it appears in no hurry to deliver a rate cut. The vote behind the status quo decision was a threeway split, with six members voting for a hold, two for a 25bp hike, and one for a 25bp cut. Our economists expect the first BoE rate cut to come in Augustfollowed by one 25bp reduction per quarter, taking the policy rate to 3.75% by end2025.

Source: Bloomberg, HSBC
Source: Bloomberg, HSBC

The USD is likely to strengthen modestly against the EUR and GBP over the medium term

Market repricing of a less aggressive global easing path has seen the USD outperform in the G10 space so far this year (Bloomberg, 1 February 2024). Geopolitical uncertainty might also provide support to the ‘safe haven’ USD in the weeks and months ahead. Over the medium term, we expect the USD to strengthen modestly against the EUR and GBP, amid the US economy’s continued outperformance against the Eurozone and the UK (Chart 2). The USD could also be supported by its ongoing yield advantage.

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