The pound is steady this morning ahead of what promises to be a consequential 48 hours for currency markets. The Bank of England announces its first interest rate decision of the year at noon, followed by the European Central Bank tomorrow. Both are expected to hold fire.
Sterling enters the day supported by a brightening UK economic outlook, though the path to further rate cuts has been complicated by the recent unexpected rise in inflation to 3.4%. While Andrew Bailey led a narrow cut in December, markets now see a 95% chance he will keep borrowing costs steady at 3.75% today to ensure price stability.
Eurozone inflation data published yesterday gave the ECB little reason to change course. Consumer prices rose just 1.7% in January – the first reading below the 2% target since last spring. Core inflation also retreated to a four-year low at 2.2%. With price pressures easing faster than expected, rate-setters in Frankfurt look set to keep policy steady tomorrow.
Across the Atlantic, investors are still digesting President Trump’s nomination of Kevin Warsh as the next Federal Reserve chair. The dollar rallied on the news last week, gaining against almost every major currency as markets viewed Warsh as more credible – and potentially more hawkish – than feared. Gold and silver suffered their worst week in years, though prices have since stabilised somewhat.
The mood in precious metals improved this week, but the underlying message is clear: fears about Federal Reserve independence have eased. For now, at least. Warsh’s reputation as an inflation hawk reassured investors who had worried Trump might install a loyalist willing to slash rates regardless of economic conditions.
Back in the UK, economists polled by Reuters overwhelmingly expect rates to stay unchanged today, though the real intrigue lies in the vote split. December’s decision was narrowly carried five votes to four. Any shift in that balance – or in the Bank’s quarterly forecasts – could move sterling more than the headline decision itself.
