After the Fed Fails to Excite the Markets, All Eyes Are Turning to the Bank of England
After the Fed Fails to Excite the Markets, All Eyes Are Turning to the Bank of England
By:Ilya Spivak
The BOE seems to have room to reassure markets an easing remains underway, with this month marking a pause
The Fed failed to excite the markets despite delivering on dovish expectations with a big cut in interest rates.
So, all eyes are now turning to the Bank of England, which is expected to keep rates unchanged.
Comments signaling the rate cut cycle will continue may hurt the British pound.
The Federal Reserve seemingly gave the markets everything they wanted. Officials cut rates by 50 basis points (bps), signaled two more 25bps reductions are on the menu in November and December and laid out plans for a further 100bps in easing for 2025. That’s almost exactly in line with market pricing ahead of the announcement.
Traders offered a circumspect response, as expected. Stocks burst higher and the U.S. dollar slumped in the moments after the Fed’s decision came across the wires, then rapidly reversed course. The bellwether S&P 500 and the tech-tilted Nasdaq 100 are now on pace to finish the day with modest losses, while the greenback aims at a higher close.
After the Fed, interest rate watchers turn to the Bank of England
Attention now pivots across the Atlantic as the Bank of England (BOE) delivers its own policy update. It is expected to hold fire this month after starting its easing cycle with a 25bps rate cut in August. Markets price in 42bps further in 2024, implying standard-sized cuts are likely at the U.K. central bank’s meetings in November and December.
In the run-up to the policy meeting, August consumer price index (CPI) data showed core inflation quickened for the first time since May 2023. It rose to 3.6% year-on-year, narrowly topping forecasts penciling in 3.5%. The British pound rose as the numbers came across the wires, suggesting some pushback on rate cut bets (as expected).
Looking deeper into the data, service sector inflation remained the most worrying bit for BOE officials. While headline CPI has come down from a peak of 11.1% year-on-year to current levels, the services component registered at 5.6% in August. That’s down less than 2 percentage points from the peak at 7.4%.
The British pound may fall even as the BOE holds back a rate cut
Much of the story here seems to be linked to wages, but these have been trending helpfully lower recently. Growth cooled to just 4% year-on-year in July, the slowest since November 2020. More of the same might be likely if the economy continues to stagnate. Gross domestic product (GDP) failed to grow in June and July.
What’s more, a one-off jump in airfares seems to have skewed services inflation higher in August. They rose at the second-fastest pace on record. Still, the BOE probably has coverage to hold fire this time as leading purchasing managers’ index (PMI) data hints at a cautious pickup in the pace of economic activity growth last month.
On balance, this seems to leave a bit of room for BOE officials to reassure the markets that an easing remains underway, with this month marking a pause instead of a loss of confidence in the direction of travel. That could cement conviction in 50bps of further easing this year, pulling the British pound lower.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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