Weekly Market Commentary

Economic

Summary:

We watch U.S. core PCE data for August out this week. We think inflation will prove sticky and could surprise the Fed again as it did earlier in the year.

The U.S. presidential election outlook underwent a reset after Biden’s decision to drop out and endorse Harris as the Democratic nominee for president. Since then and following the debate this month, Harris has taken a slight lead in most national polls, according to RealClearPolitics data. See the chart. The race appears to be close in key battleground states where Harris has closed Trump’s lead and made the race more competitive. Harris’ policy views have mostly been consistent with Biden’s – though she has outlined a number of new proposals including expanding the child tax credit and offering financial support for homebuyers. Yet both candidates could face constraints on enacting their agenda – especially on fiscal policy – if their party doesn’t hold unified control of Congress. This comes as federal regulation may face new limits after recent Supreme Court decisions.

Neither party has prioritized tackling the budget deficit. Harris has largely adopted Biden’s tax plan, such as higher corporate taxes, with some key differences like the capital gains tax on wealthy households. Trump plans to fully extend the provisions of the Tax Cuts and Jobs Act (TCJA) expiring in 2025 and propose new cuts, including to corporate taxes. Trump says he will boost revenues by levying tariffs on a broad range of U.S. imports. Control of Congress will dictate the size and scope of TCJA extensions and any government spending cuts. Deficits are one reason we see inflation staying above pre-pandemic levels.

Sectoral policy impact

Energy would be a key policy priority of either administration, including bipartisan agreement on the need for permitting reform to build energy infrastructure. U.S. oil and gas output hit new highs under Biden, supporting the energy sector. A Harris administration would mean a continuation of current energy policies, including support for clean energy. Under a Trump administration, Republicans would look to boost energy production and scale back implementation of the Inflation Reduction Act, like credits for electric vehicles. Yet we think the act is unlikely to be repealed entirely.

We see trade as another area with macro implications. Both candidates are likely to pursue additional export controls on national security grounds, especially in advanced technology. On tariffs, Harris is likely to maintain the status quo, with the potential for more targeted tariffs against China. Trump’s proposed 60% tariffs on China and 10-20% broad tariffs would be a major escalation. Increased protectionism under either administration reinforces geopolitical and economic fragmentation, one of the structural factors we see keeping inflation higher medium term. Reduced legal immigration under either administration – though it is a centerpiece of Trump’s campaign – could also have implications on the labor market.

One area highly dependent on the election outcome is regulation. A Trump win could mean some deregulation, including the rolling back of regulation for banking in particular. Big tech may still be a target for bipartisan antitrust measures. By contrast, a Harris win could reshape the healthcare landscape through expanded Medicare or drug price caps.

Our bottom line

Policy differences between Harris and Trump are sharpening. Control of Congress will be key for assessing how their policy agendas could be implemented. We see potential impacts in sectors like energy, tech, healthcare and financials.

Market backdrop

U.S. stocks struck new all-time highs last week, with small cap stocks leading the way. Stocks regained their footing after the Fed delivered a larger 50-basis point rate cut. We think the Fed’s mixed messages – speaking of solid growth and many more rate cuts to come – could mean abrupt policy changes and volatility. U.S. 10-year Treasury yields inched up to around 3.75% after reaching 15-month lows. The curve between two- and 10-year yields hit its steepest levels since mid-2022.

We watch U.S. core PCE data, the Federal Reserve’s preferred measure of inflation, for August out this week. The Fed’s mixed messages after its 50-basis point policy rate cut last week show that it risks being surprised again if inflation proves sticky, as it was at the start of the year. The hotter-than-expected CPI for August was a reminder that inflation pressures remain, and wage gains have not eased enough for inflation to stay near the Fed’s 2% target. Weekly Market Commentary_2

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Justin

Cryptocurrency

Bitcoin’s (BTC) market capitalization has skyrocketed by an astounding 350,000% since its inception when compared to its traditional safe-haven rival, gold.

New signals suggest that Bitcoin may be on the verge of another extended price rally, signaling renewed momentum against the precious metal.

Bitcoin may grow over 400% against gold in 2025

The BTC/GLD ratio chart compares the assets’ performance and could serve as a barometer to gauge BTC’s adoption rate compared to gold. For instance, the ratio’s rise reflects Bitcoin outperforming gold in terms of market cap performance—and vice versa.

According to veteran market analyst Peter Brandt, the Bitcoin-to-gold ratio may rise by more than 400% in 2025. Brandt cites a classic technical pattern for his extremely bullish outlook.

Dubbed inverse head-and-shoulders (IH&S), the pattern develops when the price forms three consecutive troughs, with the middle trough—called the head—deeper than the other two, called the left and right shoulders. The pattern forms beneath a common support line called the neckline.

As a rule of technical analysis, an IH&S pattern resolves when the price breaks above the neckline while accompanying a rise in trading volumes. In doing so, it rises by as much as the maximum distance between the neckline and the head’s deepest point.

BTC/GLD weekly ratio chart. Source: Peter Brandt

Applying the same technical principle on the BTC/GLD ratio chart brings its upside target to around 123. In other words, the price of 1 BTC may equal 123 ounces of gold as early as in 2025, up by over 400% compared to 24 ounces as of Sept. 22, 2024.

Bitcoin ETF market set to grow to $220B

The idea of Bitcoin overtaking gold has been fueled by its rapid adoption, particularly by institutional investors and the launch of Bitcoin exchange-traded funds (ETFs), which have bolstered Bitcoin’s presence in investment portfolios.

The approval of Bitcoin ETFs has resulted in inflows of over $17.69 billion since January 2024, with projections that the Bitcoin ETF market could grow to as much as $220 billion by 2027, using gold ETFs as a benchmark.

In addition, experts like Anthony Scaramucci argue that Bitcoin will eventually surpass gold’s market capitalization within the next decade, citing BTC’s advantages, such as scarcity and portability.

Source: COINTELEGRAPH

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Owen Li

Economic

Vietnam aims to have at least one semiconductor fabrication plant and 10 packaging plants by 2030, and will launch a fund to help foreign investors mitigate the impacts of the global minimum business tax, the government said on the weekend.

The country's semiconductor industry is targeting revenue of US$25 billion (RM104.9 billion) by 2030, the government said in a statement after the release of its semiconductor industry development strategy on Saturday.

The Southeast Asian country, a regional manufacturing hub, is seeking to move to high-tech industries from labour-intensive ones. As part of its drive, the country aims to have 50,000 semiconductor engineers by 2030, the government said.

Several global electronics and semiconductor firm including Intel, Samsung, Amkor Technology, Qualcomm and Marvell Technology have facilities in the country.

Beyond the initial 2030 target, the government said it plans to have at least three semiconductor fabrication plants and 20 packaging plants, with annual revenues of US$100 billion, by 2050.

In July, the Ministry of Planning and Investment said it was finalising a draft plan to set up a fund to help attract foreign investment into high-tech industries and maintain the country's competitiveness.

Source: Theedgemarkets

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Justin

Economic

Korea's exports lost 1.1 percent on-year in the first 20 days of September, data showed Monday.

Outbound shipments reached $35.58 billion in the Sept. 1-20 period, compared with $35.97 billion tallied a year earlier, according to the data from the Korea Customs Service.

Per-day exports, however, advanced 18 percent on-year to $2.74 billion.

The number of working days came to 13 over the cited period, compared with 15.5 days a year earlier.

Imports shed 4.5 percent on-year to $34.8 billion during the period, resulting in a trade surplus of $800 million.

In August, exports rose 11.4 percent on-year to $57.9 billion, the 11th consecutive monthly gain, on the back of strong demand for semiconductors, government data showed.

Exports of semiconductors, a major export item, jumped 26.2 percent to $7.48 billion during the first 20 days of this month.

Semiconductor exports accounted for 21 percent of the country's total exports during the cited period, up 4.5 percentage points from a year earlier amid an industry cycle upturn.

Auto exports, however, shed 8.8 percent to $2.98 billion, and those of automotive parts decreased 13.3 percent to $1.13 billion.

Sales of petroleum products lost 5 percent to $2.85 billion, and exports of steel products went down 9.5 percent to $2.38 billion.

By nation, shipments to China edged up 2.7 percent to $7.7 billion, while exports to the United States shed 5.9 percent to $6.17 billion.

Exports to the European Union dropped 15.1 percent to $3.55 billion, but those to Vietnam gained 1.2 percent to $3.33 billion.

Shipments to Taiwan spiked 79.8 percent to $1.99 billion, while exports to Japan dived 12.4 percent to $1.49 billion.

The government expected exports to advance 9 percent this year to reach a record high of over $700 billion.

Source: Koreatimes

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Pepperstone

Economic

The Week That Was – Themes

The moment that participants had spent most of the year waiting for finally occurred on Wednesday, with the FOMC delivering the first rate cut of the cycle, in aggressive fashion, reducing the target range for the fed funds rate to 4.75% - 5.00%.

This 50bp cut was contrary to my own forecast, and to consensus expectations, though was broadly in line with market pricing, with the OIS curve having discounted around a 60% chance of such a move, having undergone a significant dovish drift during the FOMC’s pre-meeting ‘blackout’ period.

Interestingly, the decision to plump for such an aggressive move was not a unanimous decision among voting members on the FOMC. Governor Bowman dissented in favour of a more modest 25bp move, the first dissent by a Governor in almost 2 decades. A 25bp move, in my mind, would’ve been the more appropriate one, considering that inflation remains above target, unemployment is not elevated to a worrying degree, and the economy has grown at a rate north of 2% in seven of the last eight quarters. Still, what I – or any other participant – thinks the Fed should do is immaterial, we must analyse and react only to what they will do.

The main driver not only of the 50bp cut, but also a relatively dovish dot plot, signalling a further 50bp of easing this year, followed by another 100bp next year, was seemingly the FOMC’s latest round of economic forecasts. The Committee’s median expectation is now for the unemployment rate to end the year at 4.4%, 0.4pp higher than foreseen in June, while headline inflation is seen 0.3pp lower at 2.3%, per the PCE gauge. Only time will tell whether placing such a huge amount of faith in forecasts which are notoriously inaccurate will prove wise, or folly.

In any case, the September ‘dot plot’ did provide a very useful gauge of how elevated monetary policy uncertainty remains, as we move into the most delicate point of the cycle – removing restriction. While the 2024 median dot points to a further 50bp of cuts this year, 9 of the 19 member FOMC placed their individual estimate above this median. Furthermore, while the most hawkish two on the Committee see just one more 25bp cut before 2024 is out, their most dovish colleague seeks a whopping 100bp further easing in the same period. It would seem that policymakers have as little idea as the rest of us as to a defined course of the speed at which rates will be cut, even if the direction of travel is now clearer than ever.

Thankfully, other G10 central bank decisions were substantially more straightforward.

On Threadneedle Street, the Bank of England’s Monetary Policy Committee voted 8-1 in favour of holding Bank Rate steady at 5.00%, taking a pause for breath having delivered this cycle’s first 25bp cut back in August. Only external MPC member Dhingra favoured a second straight rate reduction, though such a dissent is in line with her well-known uber-dovish stance. The MPC’s guidance was largely a ‘carbon copy’ of that issued previously, noting a need for policy to remain restrictive for ‘sufficiently long’ in order to stamp out persistent underlying price pressures within the UK economy, while also reiterating that policymakers shall follow a ‘meeting-by-meeting’ approach to future policy decisions.

What was, perhaps, more interesting than the Bank Rate decision, was the MPC’s unanimous decision to maintain the pace of balance sheet run-off at £100bln over the next year. Given the sizeable increase in redemptions next year, this decision means that the BoE’s active gilt sales will fall from £50bln, to a paltry £13bln – albeit, news that is likely to be welcomed in HM Treasury given that fewer losses will now be crystallised, somewhat easing fiscal constraints ahead of October’s Budget.

That said, the decision to continue with QT at all could be considered a perplexing one. Not only are there increasing signs of funding stresses within the UK financial system, with usage of the BoE’s short-term repo facility surging week-by-week, but there is also now a situation where the two primary monetary policy levers – interest rates, and the balance sheet – are working against each other. Given that the Fed are likely to wrap up QT before year-end, it seems difficult to imagine that the BoE could plough on much into 2025 before having to wrap things up themselves.

Elsewhere, the Norges Bank held rates steady at 4.50%, as expected, while also flagging that “gradual reductions” are likely to take place from the first quarter of 2025. Such a stance was broadly in line with market expectations, and with the NOK OIS curve pricing a negligible 13bp of easing by year-end, such a statement caused little by way of significant vol.

The Bank of Japan also sprang little by way of surprise, holding the policy rate steady at 0.25%, as expected, in a unanimous vote. Nevertheless, the prospect of a further rate hike before year-end remains on the cards, with policymakers having raised their assessment of consumer spending, while also maintaining expectations for export price growth, seemingly signalling that recent market turmoil has not materially altered the BoJ’s plans to continue to raise rates.

Despite that, it seems the window to raise rates to a significant extent is closing rather rapidly, owing to domestic developments, but also to the FOMC having now embarked on their easing cycle. BoJ Governor Ueda struck a relatively dovish note at the press conference, stating that upside inflation risks have “eased”, giving the BoJ more room to “mull” policy shifts.

Away from the world of central banking, the economic data once again bore out the theme of US economic outperformance. Retail sales rose a better-than-expected 0.1% MoM in August, while industrial production rose 0.8% MoM in the same period, quadruple the pace that consensus had expected. Meanwhile, on the labour market, initial jobless claims fell to a four-month low 219k in the week to 14th September, coinciding with the nonfarm payrolls survey period, while continuing claims also fell considerably, to 1.829mln. Once more, for those at the back, data of this ilk doesn’t scream “we need a 50bp cut!”.

Elsewhere, data was somewhat more mixed. The Australian economy continued to add jobs at a healthy clip in August, with net employment having risen by +47.5k, building on the +58.2k jobs added in July, though unemployment held steady at 4.2%.

Economic news closer to home was less positive, however. Here in the UK, headline CPI rose by 2.2% YoY in August, unchanged from the pace seen in July. More worryingly, core CPI rose by 3.6% YoY, 0.3pp quicker than the pace seen in July, while services CPI rose by 5.6% YoY, 0.4pp above the rate seen a month prior. While statistical base effects contributed significantly to these increases, and both metrics were still below the BoE’s forecasts, policymakers will be seeking significant further disinflationary progress, particularly in services prices, before having the confidence to deliver another Bank Rate cut, which I still have pencilled in for November.

The Week That Was – Markets

Despite the host of moving parts, the story for financial markets was a relatively simple one – a risk-on rally in equities, a broadly softer USD, firmer gold prices, and a sell-off at the long-end of the Treasury curve.

I should note, however, that the bulk of these moves only came towards the back end of last week, after the dust had settled after the FOMC’s decision on Wednesday. While conditions over said decision were incredibly choppy, and most participants probably suffered from whiplash as a result, a clearer market bias became evident as calmer heads subsequently prevailed.

As noted, equities continued to gain ground, with the S&P 500 notching back-to-back weekly gains, and rising to fresh record highs.

While I may, at this point, be sounding like something of a broken record, my three-pronged bull case of strong economic growth, solid earnings growth, and a forceful Fed put, remains firmly intact. This should see the path of least resistance continue to lead to the upside, and result in dips continuing to be seen as buying opportunities, with investors still having the confidence to remain further out the risk curve. That ‘Fed put’, incidentally, became even stronger this week, as we now know it’s strike price! Unemployment north of 4.4% likely sees the FOMC chuck a 50bp cut our way once more, while 25bp moves at every meeting is the base case in the meantime. Either way, the policy outlook is providing an increasing strong fillip for risk appetite.

Concurrently, that same policy outlook is posing headwinds for the greenback, as the FOMC plot a much faster course back to neutral than G10 peers, such as the BoE and ECB, who are taking a more ‘slow and steady’ approach to removing policy restriction.

The greenback, as a result, slipped to fresh YTD lows at 100.20 this week, with most other G10s benefitting – cable rose north of 1.33 for the first time since March 2022, the EUR notched its best week in a month, while the Aussie chalked up back-to-back weekly gains, on its way north of the 68 figure once more.

A softening dollar once more proved to be a boon for gold, with the yellow metal again finding its shine, despite the long-end of the Treasury curve continuing to sell-off. Of course, the FOMC signalling policymakers being in something of a rush to get back to neutral will also have provided a tailwind to the zero-yielding asset.

Gold, in my view, remains a momentum trade at its core, having moved out of line with its traditional fundamental drivers for much of the year so far. As such, the yellow metal rising north of $2,600/oz last week for the first time, closing at a record high on Friday, is only likely to bring more buyers to the table.

All that said, it was the moves seen across the Treasury curve last week that piqued my interest the most.

The front-end was as near as makes no difference unchanged before, and in the aftermath of, the FOMC decision, with the market having seemingly already accurately discounted both the likelihood of a 50bp cut, and the path that the FOMC would plot back towards neutral. The long-end, however, saw a notable sell-off, with 10s & 30s rising around 10bp apiece on a yield basis, as the latter rose north of 4% once more.

This selling at the long-end of the curve suggests a concern among participants that the Fed is not behind, but might actually be ahead of the curve – easing policy too substantially, and too quickly, into an economy that remains strong, and where inflationary pressures continue to bubble away. I would imagine that this, plus the substantial bear steepening seen last week, is causing some degree of consternation among FOMC policymakers.

Interestingly, the current historical Fed parallels are rather grim. The last two 50bp kick-offs to an easing cycle came in 2007, and 2001. Meanwhile, the last time that Treasuries sold-off after a 50bp cut was back in 2008. Let’s hope, for all our sakes, history shan’t repeat itself.

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Cohen

Economic

Prime Minister Michel Barnier opened the door to taxing wealthy individuals and large companies in a bid to repair France’s massive budget deficit and reassure international investors.

The new premier said in an interview on France 2 television Sunday that he wanted to avoid raising taxes on the middle class and workers, but emphasised that there needed to be a collective effort to cut spending and to turn around France’s “grave” debt situation.

Parties on the left and right have threatened to bring down the newly formed government, raising the risk of a swift collapse that would further cloud the outlook for France’s stretched public finances. Further complicating the situation, some lawmakers backing the new administration have said that one of their conditions to support Barnier is that he doesn’t boost taxes.

“In the necessary, national effort to repair the situation, I won’t exclude that the richest participate,” Barnier said. “In the national effort, some very big companies, multinationals that are working well, can also contribute.”

The issue is particularly explosive for President Emmanuel Macron’s centrists, who have argued that seven years of keeping a lid on taxes is a cornerstone of economic policy that slowly transformed France’s fortunes, bringing jobs and foreign investment.

But Barnier is increasingly cornered as Macron’s decision to dissolve the lower house and months of political gridlock have undermined investor confidence, driving up France’s borrowing costs compared with other European countries. Making matters worse, the nation’s fiscal situation deteriorated further over the summer under the watch of a caretaker government.

Since Macron called a snap election on June 9, the benchmark Paris stock index is down more than 6%, making it by far the worst-performing major market in Europe. The country’s government bonds have also been sliding relative to other European countries, taking the spread between French and German 10-year yields, a proxy for French risk, up about 30 basis points since before the elections.

“Our country is in a very grave situation — €3 trillion (US$3.3 trillion or RM14.09 trillion) of debt and €50 billion in interest to pay a year,” Barnier said in the interview. “A lot of our debt is on international markets — we must preserve France’s credibility.”

Barnier’s cabinet, which was announced Saturday evening, is the fruit of more than two months of factious negotiations after Macron’s bid to bring stability to parliament with an election achieved the opposite: a National Assembly split into three bitterly opposed blocs, each incapable of governing alone.

The new government hands Barnier an awkward patchwork of conservatives and centrists who haven’t always worked smoothly together. What’s more, even if he can hold together the groups, as a unit they fall far short of being able to thwart a no-confidence vote that would bring down the government.

“The question is not what government we’ll have in France but when it falls,” Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, said last week before the administration was announced. “As long as there’s going to be this French premium, we will find some reluctance from investors to come back.”

The left-wing New Popular Front alliance — which holds the largest number of seats in the lower house — has pledged to topple the government at the earliest opportunity. It doesn’t have the votes to do so alone, but it could get the support of the far-right National Rally, whose leader, Marine Le Pen, has become the de facto king maker for the new administration.

The National Rally, which is the single largest party in parliament, indicated that the new government has “no future” and is a return of “Macronism”.

Budget pressure

The priority for Barnier’s administration is to construct a 2025 budget bill in the coming weeks to tackle the expanding deficit. However, it’s already likely to miss the Oct 1 deadline to present a bill to parliament. Compounding the pressure, the European Union has put France in a special procedure designed to enforce stricter fiscal discipline in countries deemed to have excessive debts and deficits.

Without new measures to curb spending or increase tax, France’s budget deficit could reach 6% of economic output this year, Les Echos reported on Friday, citing new forecasts from the finance ministry. European Union rules cap it at 3%.

Speaking Sunday on France Info radio, National Rally Vice-President Sebastien Chenu said his party’s decision to support a no-confidence bill would depend on the budget and Barnier’s approach.

“We said we wouldn’t immediately censure the Barnier government,” he said. “On the other hand, seeing the profile of this government, Barnier hasn’t scored a good point.”

Barnier is due to address the parliament on Oct 1, which will be the first opportunity for a party to call for a no-confidence vote.

The prime minister has picked Antoine Armand, a 33-year-old with limited political experience, to take on the role of finance minister. He’ll be flanked by Budget Minister Laurent Saint-Martin, the 39-year-old head of Business France, which promotes export growth and foreign investment.

Saint-Martin will report directly to Barnier, a sign of the importance the new prime minister attaches to pushing through a budget.

“In the current fiscal context, excluding outright some exceptional and targeted taxes would not be responsible,” Armand said in an interview with Le Journal du Dimanche. “But that doesn’t make it a doctrine, and doesn’t resolve our problem: we must cut public spending and make it more efficient.”

Barnier scored one high profile appointment with the leader of the Republicans in the Senate, Bruno Retailleau, who’ll be the new interior minister. The 63-year-old has been a vocal critic of Macron’s past governments, demanding more fiscal discipline and taking a more conservative stance on social issues.

Source: The edge markets

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ACY

Economic

Recently, the Bank of England (BoE) opted to hold its ground on monetary policy, taking a markedly cautious stance compared to the US Federal Reserve’s aggressive rate cuts. While the Fed boldly implemented a significant 50 basis point reduction to fuel economic growth, the BoE chose to leave interest rates unchanged. The UK's central bank remains laser-focused on curbing inflationary pressures, underscoring a stark divergence in monetary strategies between the two economies.

Diverging Monetary Paths: Bank of England's Cautious Approach vs. the US Fed’s Aggressive Easing_1

This decision by the BoE highlights its unwavering commitment to managing inflation, an issue that has been particularly challenging in the UK due to post-pandemic supply chain disruptions, Brexit-related uncertainties, and volatile energy prices. On the other hand, the Federal Reserve’s priority has shifted towards bolstering growth, driven by concerns over a slowing US economy. These contrasting priorities—fighting inflation in the UK versus stimulating growth in the US—reflect the different economic conditions and risks faced by the two countries. The BoE’s reluctance to follow the Fed in cutting rates signals a more tempered approach, with an eye on inflationary risks that still loom large in the UK.

Diverging Monetary Paths: Bank of England's Cautious Approach vs. the US Fed’s Aggressive Easing_2

The MPC’s Vote and a Dovish Minority

The Bank of England’s Monetary Policy Committee (MPC) vote largely reflected consensus on the need for caution, with the majority favouring the status quo. However, Swati Dhingra, a prominent dovish voice on the committee, advocated for a modest 25 basis point rate cut. Her position aligns with those who fear that the BoE’s overly hawkish stance could unnecessarily hamper economic growth, especially with inflation already showing signs of easing.

Deputy Governor Dave Ramsden’s vote for no change, in contrast, reinforced the BoE’s cautious tone. His decision was echoed by Governor Andrew Bailey, who emphasized the risks of cutting rates too quickly, potentially fuelling inflation before it has been fully tamed. Bailey's remarks are crucial, suggesting that the BoE is wary of repeating past mistakes when easing policies prematurely led to inflation spiralling out of control. These narrative paints a central bank determined to tread carefully, favouring stability over short-term stimulus.

Looking Forward: Uncertainty and Market Expectations

Despite the BoE’s decision to hold rates steady, markets remain focused on the possibility of future rate cuts. Expectations for cuts by year’s end have been scaled back slightly, with investors now pricing in 43 basis points of reductions—an indication of ongoing uncertainty. This recalibration suggests that while a rate cut by December seems less likely, November remains a key month for potential action. The BoE’s stance will heavily depend on incoming economic data, particularly inflation and wage growth metrics.

One complicating factor is the BoE’s decision to keep the pace of quantitative tightening (QT) unchanged at £100 billion for the next 12 months. Some analysts had anticipated a quicker pace of QT, especially given the maturity profile of the BoE’s gilt holdings. By opting for a steady reduction, the BoE is signalling a more cautious approach, balancing its desire to normalize monetary conditions with the need to avoid undue pressure on government finances. This steady pace of QT also gives Chancellor Rachel Reeves more fiscal room to manoeuvre, potentially reducing the cost of government borrowing.

Impact on the British Pound and Economic Policy

The BoE’s cautious approach could have significant implications for the British pound, which has enjoyed recent strength. A slowdown in the pace of rate cuts may dampen the currency’s momentum, particularly if economic data points to weakening domestic demand. Inflation and wage growth will be key factors driving future policy decisions, but the upcoming Labour government budget is also a wildcard. Expected tax increases could slow economic activity, providing the BoE with additional justification for more accommodative monetary policies in the future.

However, the BoE’s decisions won’t occur in isolation. Global economic conditions, particularly in the US and Europe, will play a crucial role in shaping UK monetary policy. The US Federal Reserve, facing potential weakness in jobs data, may signal further cuts, and a struggling German economy adds another layer of complexity to the BoE’s calculus. If global growth slows and inflation moderates, the BoE may come under pressure to accelerate its easing measures. In this scenario, the pound could underperform as markets adjust to the possibility of faster and deeper rate cuts.

The Risks of Diverging Central Bank Strategies

The divergence in strategies between the BoE and the Federal Reserve reflects the differing economic landscapes each central bank must navigate. While the Fed is focusing on reigniting economic growth amid recession fears, the BoE remains primarily concerned with controlling inflation, which has stubbornly remained above target. The challenge for the BoE lies in balancing inflation control with the need to support an economy that could face headwinds from higher taxes, slower wage growth, and a cooling housing market.

For the US, the risk of cutting rates too aggressively is that it may stoke inflation again, especially if supply chain issues or commodity prices surge. For the BoE, the opposite risk exists—if it holds rates too high for too long, it could dampen growth and stifle economic recovery, particularly if inflationary pressures ease more quickly than anticipated. This delicate balancing act means that both central banks will be closely watching not just their domestic data but also international developments.

In summary, while the BoE has maintained its cautious, inflation-focused stance for now, the balance of risks is clearly shifting. As the UK economy evolves, the BoE will face mounting pressure to adjust its approach. Key domestic indicators—particularly inflation and wage growth—will play a central role in shaping future decisions, but global economic conditions and fiscal policy shifts will also influence the central bank’s path. Whether the BoE continues with its gradual approach or moves towards a more aggressive easing cycle remains to be seen, but the months ahead will be critical in determining the trajectory of both the UK economy and the pound.

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