Bank of England unlikely to cut

European markets have followed their US and Asian counterparts higher after an FOMC meeting that saw the first interest rate cut in over four years. Despite a rebound in the US 10-year yield off the back of a more patient pathway forward from the Fed, we have seen the dollar head lower, while precious metals catch a bid once again. Thankfully the risk-on move we have seen since the FOMC meeting highlights a successful job by Powell, who could have easily spooked the markets should he adopt the wrong tone. Instead, the decision to kick off with a oversized hike came alongside economic projections that allayed fears of a recession or significant uptick in unemployment, casting aside the fears that have sparked jitters over the course of the past weeks. The data-driven nature of the Fed will ensure that traders remain highly attentive to the economic calendar, with a rebound in inflation the particular concern given the implications it would have on the Fed’s plan to ease further. Nonetheless, this week marks the beginning of a new phase where the strength of the economy is prioritised over the Fed’s recent blind dedication to driving down inflation.

The Bank of England continue the central bank these today, although the bank appear unlikely to ease for a second consecutive meeting. Coming off the back of a 25-basis point move that took UK rates down to 5%, we instead have to look ahead to November for the next cut according to market expectations. The inflation report released yesterday highlighted exactly why the bank will likely take a cautious approach to easing, with core CPI spiking up to a four-month high of 3.6%. Services price pressures remain a bugbear of the BoE, and we are seeing precious few signs that we will see any tangible shift towards target for core inflation this year. Nonetheless, with headline CPI at 2.2%, the BoE doe have the basis for further easing, and there is a view that the bank will cut by 25-basis points from November onwards.