Interest Rates Start to Fall in Europe as the Fed Lags

Central Bank

Economic

Summary:

Global central banks respond differently to inflation: Swiss and Swedish banks cut rates; ECB expected to follow. BoE holds steady, Fed remains cautious but hints at future cuts. BOJ hikes rates, stands out.

Global central banks that moved together to battle inflation are starting to scatter, with European rate setters turning dovish while the U.S. Federal Reserve stays cautious about cutting too soon.

Following the most aggressive global monetary tightening cycle in decades, here's where leading central banks stand and what they are expected to do next.

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Calendar chart showing markets expectation of rate cuts

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1/ SWITZERLAND

The Swiss National Bank cut rates by 25 bps to 1.50% in a surprise move in March, leaving the Swiss franc trailing the dollar and the euro as traders bet on another cut in June.

Swiss inflation ticked up to 1.4% in April, but stayed within the SNB's target an 11th consecutive month.

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2/ SWEDEN

Sweden's Riksbank lowered benchmark borrowing rates to 3.75% from 4% on Wednesday and said it would cut further if inflation stayed moderate.

Consumer price increases have slowed to just over the 2% target as the Swedish economy stumbled under the pressure of high rates. The Riksbank's next dilemma is the weak crown and the potential for higher import costs to re-stoke inflation.

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3/ EURO ZONE

The European Central Bank is widely expected to lower rates in June, with inflation close to its 2% target and growth tepid. Markets anticipate almost three cuts this year.

The big question is how far the ECB can diverge from the Fed. Policymakers might worry that sticky U.S. inflation is a harbinger of things to come across developed economies.

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4/ CANADA

Canadian inflation ticked up to 2.9% in March and population growth is boosting the economy, yet optimism from Bank of Canada governor Tiff Macklem about price pressures moderating has bolstered rate cut bets.

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Traders see a roughly 60% chance of a June cut and fully expect lower borrowing costs by July.

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5/ BRITAIN

The Bank of England held interest rates at a 16-year high of 5.25% on Thursday, but Governor Andrew Bailey said he was "optimistic things are moving in the right direction" and a deputy governor voted for a cut.

Bailey said the BoE still needs to see more evidence that inflation - running at 3.2% in March - will stay low before cutting rates. Markets expect the first reduction in August.

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6/ UNITED STATES

The Fed has kept rates in the 5.25% to 5.5% range since July 2023. It held rates steady on May 1 and soothed some fears, following hot inflation readings, that its next move would be another hike.

Wall Street's S&P 500 share index, which tumbled around 4% in April (.SPX), opens new tab, has recouped much of that loss as some Fed officials reaffirmed rate cuts were coming, eventually. .

Traders, who back in January had expected up to 150 bps of Fed cuts this year, now price in just over 40 bps worth. A first rate reduction is priced in for September.

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7/ NEW ZEALAND

Inflation in New Zealand, at 4%, is likely to stay above the Reserve Bank of New Zealand's 1%-3% target as migration raises domestic demand, the Organisation for Economic Co-operation and Development said this week.

Investors don't expect rate cuts until October or November.

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8/ AUSTRALIA

The Reserve Bank of Australia held rates at a 12-year high of 4.35% on Tuesday. It is not expected to lower borrowing costs this year as it forecasts higher inflation and the government primes households for tax giveaways from July.

Futures markets price a 20% chance of a hike in August.

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9/ NORWAY

Norway's central bank turned more hawkish on May 3, when it held rates at 4.50% and warned they may stay there for "longer than previously thought."

That stance is because of a robust economy and core inflation, last reported at 4.5%, far exceeding its 2% target.

The Norges Bank had eyed a September cut but most economists now expect no move before December or even next year.

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10/ JAPAN

The Bank of Japan is the outlier, raising rates out of negative territory in March in its first hike in 17 years.

The move did little to close the yawning gap between Japanese and American borrowing costs, however, driving the yen to fresh 34-year lows and prompting government intervention to boost the currency.

BOJ Governor Kazuo Ueda stepped up the hawkish rhetoric this week, saying the central bank could take action if the weak yen pushes up inflation. Interest Rates Start to Fall in Europe as the Fed Lags_12

Interest Rates Start to Fall in Europe as the Fed Lags_12

Source: Reuters

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Samantha Luan

Economic

Political

Russia-Ukraine Conflict

Within days of Russian forces invading Ukraine in early 2022, architect Oleh Drozdov made up his mind: he would move his home and business from the besieged eastern city of Kharkiv more than 1,000 km to the west, far from the fighting.

Now, with the war in its third year, his practice may finally be returning to growth, as businesses like his adapt to the conflict and search out opportunities alongside the formidable challenges.

"The storm is over. There are many holes in our boat but we are moving forward," Drozdov said from his offices in a historic building in the centre of Lviv, a city of some 700,000 people close to the Polish border.

On the city's outskirts, cranes dot the skyline and industrial parks and other projects are being built.

In some ways Drozdov & Partners is well placed to adapt to the shock of war. It is small and footloose, and, in a country where millions of people and thousands of companies are displaced, demand for buildings and renovations is high.

"Some new opportunities have started to open up slowly," said Drozdov. "There are investments in this part of the country as businesses and people are relocating."

His practice is among 19,000 companies that have registered in new locations within Ukraine since the invasion, according to Opendatabot, which provides data from official registries, in a mass migration of businesses from east to west that may never be reversed.

"Thanks to the adaptability of businesses, support from partners and government programmes, Ukraine is increasingly taking on the characteristics of a wartime economy," First Deputy Prime Minister Yulia Svyrydenko told Reuters.

"If we compare the economy's structure in 2023 with that of pre-war 2021, we clearly see this transformation. The Ukrainian economy is showing resilience and adaptability ... proving its ability to navigate through difficult times."

WEST WINS FOR NOW

In the east of Ukraine, where fighting has raged during offensives and counteroffensives, towns and villages lie in ruins. Kharkiv is being heavily bombed.

A study by the World Bank, United Nations, European Commission and the Ukrainian government published in February estimated the total cost of rebuilding the economy at $486 billion, a figure that continues to rise as more damage is incurred.

Far to the west, urban centres are faring better.

Viktor Mykyta, regional governor in Zakarpattia which borders Poland, Slovakia, Hungary and Romania, described a rush of new businesses ranging from salt production to furniture and textiles.

Before the war, the mountainous region's economy relied heavily on tourism and remittances sent home by Ukrainians working abroad.

"When the war broke out, a lot of businesses moved, jobs were created, the budget began to be filled," Mykyta said.

Officials in Lviv region report a similar trend, with logistics, energy, construction and IT firms among those setting up operations there.

Of the few wartime foreign investments announced, most are in central and western regions - in part because they stand to benefit most should Ukraine succeed in its aim of joining the European Union one day, analysts said.

Projects include Turkish Onur Group's plans to invest $50 million in graphite mining in western Khmelnytskyi region and a further $150 million in renewables in Zakarpattia.

Germany's Bayer said it would invest 60 million euros in its corn seed production facility in central Zhytomyr region, while Ireland's Kingspan Group has announced a $280 million investment in a facility in Lviv region.

Back in Kharkiv, Ukraine's second city, the reality is very different. Oleh Synehubov, the region's governor, said 70% of large enterprises have been destroyed or relocated or suspended their operations.

"Our regional and city budgets have fallen by 40%," he told Reuters.

World Bank data shows that businesses in eastern Ukraine experienced a 70% slump in sales between the invasion and the end of 2023, and those in the south a drop of 63%. In comparison, companies' sales in the west decreased 39%.

NEED FOR WORKERS

Official data on the impact of the war on different sectors is patchy, and recent trends could change if there are dramatic shifts on the battlefield. Russian attacks on energy infrastructure is also a major challenge for many firms.

After the economy collapsed by a third in 2022, it rebounded by 5.3% in 2023 and the government forecasts growth of 4.6% this year. The steel industry, once Ukraine's key exporter, contracted by about 80% in 2022 and grew only 8% in 2023.

The economy ministry said that so far in 2024, the fastest pace of growth has been in construction, processing, transport and retail.

The defence industry has also expanded significantly. According to Ukraine's strategic industries ministry, the number of defence manufacturers has more than doubled since February, 2022.

As some sectors have expanded, job vacancies have grown fastest in the west of the country, according to Work.ua, an employment portal which reported a record number of wartime vacancies in April.

Vacancies were up 55% in Zakarpattia at the end of February compared with pre-war levels while Lviv region had about 8,500 vacancies open at the start of March, up 23% from before the invasion.

A recent survey from the European Business Association, one of Ukraine's leading business groups, showed that about 74% of companies have suffered staff shortages - the result of millions of people fleeing overseas and hundreds of thousands of men serving in the military.

Drozdov has struggled to hire enough staff at his practice and to fill vacancies at an architectural school that he also runs.

Mindful of the long term task of rebuilding the country, Drozdov is launching a masters programme for young architects with a focus on rebuilding the shattered east. He hopes to return one day to Kharkiv.

"When there is an opportunity we will return there physically. It will be a gradual process."

Source: Reuters

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Warren Takunda

Economic

The pound slipped on Thursday after the Bank of England (BoE) held its benchmark interest rates at 5.25%, while hawkish opinions from Bank of Japan (BOJ) members helped slow the yen's fall.

The dollar index rose as traders start to focus on U.S. inflation data due next week and its implications for Federal Reserve policy.

Sterling fell 0.3% to $1.2462, moving away from a three-week high of $1.2709 touched last week. The BoE held rates but a second official in the Monetary Policy Committee backed a cut and Governor Andrew Bailey said he was "optimistic that things are moving in the right direction".

BoE officials voted 7-2 to keep rates at a 16-year high. Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to 5%.

According to LSEG data, money markets had almost fully priced in that the central bank would keep rates unchanged. But investors have been watching for signs to firm their expectations on when cuts could come.

They now expects a first cut in August, with the odds of such a move coming in June down to a 44% chance, compared to a 55% chance seen earlier in the day.

“Today's decision to maintain the base rate at 5.25% came as no surprise to the markets, yet the certainty of a summer rate cut remains in question," said Colleen McHugh, Chief Investment Officer of Wealthify.

Elsewhere, against the Japanese yen, the dollar has been slowly inching up after it fell 3.4% last week, its biggest weekly percentage drop since early December 2022.

The yen was 0.23% lower on the day at 155.93 per dollar, with the Japanese currency briefly finding some support in the BOJ's summary of opinions released on Thursday, which showed board members were overwhelmingly hawkish at their April policy meeting, with many calling for steady interest rates hikes.

The "BOJ appears to be hinting at the next rate hike, which could come in June or July as final results of wage negotiations come out," said Charu Chanana, head of currency strategy at Saxo.

In the U.S., last week's Fed policy meeting and downside surprise in U.S. job growth have markets increasing bets for two rate cuts this year. But a chasm remains between Japan's ultra-low yields and those in the United States.

Japan's top currency diplomat Masato Kanda on Thursday reiterated a warning that Tokyo is ready to take action in the currency market.

Market players suspect Tokyo spent some $60 billion last week to stem the yen's slide after it hit its weakest in 34-years against the dollar around 160 yen.

The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.17% to 105.70, having touched a one-week high earlier.

Traders will be closely watching April U.S. producer price index (PPI) and the consumer price index (CPI) out next week for signs that inflation has resumed its downward trend toward the Fed's 2% target rate.

China's offshore yuan was about flat on the day at 7.2335, as data revealed China's exports and imports returned to growth in April after contracting in the previous month.

That could mean a potential delay for rate cuts some believed China would need to make to meet its 2024 GDP goal.

Source: Reuters

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Cohen

Economic

Bank Negara Malaysia left the overnight policy rate at the post-pandemic high of 3%, as expected by all 24 economists in a Bloomberg survey. The central bank last adjusted borrowing costs a year ago, when it raised the benchmark by 25 basis points.

A strengthening economy, low inflation and a currency that's outperformed most peers in Southeast Asia this year support BNM's decision to stand pat, even after Indonesia's surprising rate hike last month. The recovery in exports is expected to gather momentum, supported by the global technology upcycle and increasing tourist arrivals and spending, BNM said.

“The monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects,” BNM said in a statement.

The central bank said it will continue to manage risks arising from heightened financial market volatility as it braces for the growing likelihood that interest rates in the US will remain elevated for longer. The central bank is looking beyond monetary policy to support the currency. Policymakers have taken coordinated measures to shore up the ringgit, helping it to stabilize from a 26-year-low reached in February.

“There is no catalyst for BNM to alter the monetary policy stance at this juncture given stable domestic economic growth and benign inflation,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. “Malaysia possesses non-monetary policy levers to provide support to the ringgit.”

The central bank reiterated that the local currency doesn't reflect Malaysia's economic fundamentals and growth prospects, even as it warns of downside risks to the outlook, including the threat of further escalation of geopolitical tensions and unexpected price pressures.

“Over the medium term, domestic structural reforms will provide more enduring support to the ringgit,” BNM said.

The currency was little changed at 4.7397 versus the dollar as of 3.45 p.m. in Kuala Lumpur.

Gross domestic product is forecast to expand between 4% to 5% in 2024. Inflation has hovered below 2% for the past seven months and is expected to remain moderate — though the outlook is highly dependent on changes to price controls as well as global commodity prices and financial market developments, according to the central bank.

Malaysia plans to phase out blanket fuel subsidies and replace it with targeted assistance this year, potentially stoking price pressures. But details are scarce, making it tricky to predict its precise impact. That's reflected in the central bank's wide inflation forecast range of between 2% and 3.5% for 2024.

Policymakers remain “vigilant to ongoing developments to inform the assessment on the outlook of domestic inflation and growth,” the central bank said.

Source: Bloomberg

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Alex

Economic

Belgium is shackled with a political system plagued by dysfunction and is spending beyond its means, putting it on a path of ever-increasing debt.With a population the size of Ohio's and a slightly smaller gross domestic product, the lack of restraint overshadowing the country's public finances increasingly resembles that of the world's biggest economy, but without the impunity that comes with printing the dollar.

As with the US, investors appear unfazed at its borrowing binge. But Belgium, heading into elections in June, is on track to run western Europe's worst deficits for years to come, a standout status that may become a test of the bloc's resolve to reimpose fiscal discipline.

“For sure, the current state of affairs cannot continue,” said Peter Vanden Houte, an economist at ING in Brussels. “It might take a very long time to have a new government. All of this means that Belgium indeed might be vulnerable to unrest on financial markets.”

The seemingly unstoppable path to higher debt there is the product of political stasis in a divided country led by Premier Alexander De Croo and his seven-party coalition.

While it shares troubles with other rich economies such as higher borrowing costs, an aging population, weak productivity growth and pressing defense and climate commitments, the nation has also become increasingly difficult to govern — and elections on June 9 probably won't change that.

Like the US, Belgium's debt as a percentage of GDP already exceeds 100%, and that ratio will rise by 10 percentage points in both countries by 2029, according to the International Monetary Fund.

It will soon have the euro area's third-biggest debt ratio after Greece and Italy. Stoking that total are annual budget deficits projected by the IMF of around 4% to 5% — just a percentage point or so less than the US.

While bigger peers such as France and Italy have recently started borrowing more, they at least aim for shortfalls closer to the 3% level the Commission is supposed to enforce. Such countries will soon earn reprimands from the EU, with Belgium likely to draw notable scrutiny for its lack of budget discipline.

Any aspirations to fix its public finances have dissipated as part of trade-offs inherent in a fragile political setup. It took a standoff lasting almost 500 days to form the current government after elections in 2019, and persisting tensions torpedoed reforms including plans on taxation abandoned last year.

While polarization festering between the Dutch-speaking north and the French-speaking south has long been a problem in the country of almost 12 million people, the aftermath of June's election could be even trickier.

Increasing support for a populist party could complicate things. The far-right, anti-immigrant Vlaams Belang group, which has long called for the northern Flanders region to secede, is polling above 25% there.

It's not likely to win a role in the federal government, but its gains could leave other winning parties with even less margin to form a functioning coalition. Such a scenario could leave a caretaker administration in place for longer, with little authority to tackle Belgium's debt woes.

The public finances do feature in the election. The nationalist New Flemish Alliance party, which has the largest number of members in the federal parliament, wants to form a downsized provisional government to address the matter after the vote.

“We need a lot of efficiency, hard decisions, political leadership, and that is exactly what this country has been lacking,” Antwerp Mayor Bart de Wever, who leads the party know as N-VA, told reporters this week.

ING's Vanden Houte isn't convinced — “if you look now at the election programs of the different political parties, no one is really talking about how to bring the budget down,” he said.

But even if such policies were to prevail, a diffused administrative structure poses another hurdle recently highlighted by the central bank. Meanwhile increasing budget pressures don't help either: Despite hosting NATO's headquarters, Belgium spent only 1.1% of GDP on defense in 2023, the second-lowest tally in the alliance — and far from the 2% level members target.

Credit-assessment companies are watching closely, with both Fitch Ratings and Scope Ratings having negative outlooks.

“It looks like there is certainly the risk of a downgrade in the medium term,” said Dario Messi, a fixed-income strategist at Julius Baer. “This could result in a spread coming closer to countries like Spain and Portugal.”

What has supported the country's high-quality credit status — no more than three steps away from the top grades awarded by such companies — is its wealth. Belgium's GDP per capita, adjusted for purchasing power, was the sixth-highest in the EU last year. Average maturity of its debt exceeding a decade is another buffer.

As with other euro-area peers, the country's bonds have savored benign financial markets recently. The benchmark 10-year yield is hovering around 3%, close to the year-to-date average, leaving the premium over German peers — a common measure of risk — near to a two-year low at 54 basis points.

With investors unbothered for now, it falls to the EU to nudge members to fix their public finances. While its debt and deficit regime was suspended during the pandemic, the rules now apply again, albeit with more leeway granted to countries after they ratify a recent reform.

Eleven economies violated the deficit threshold of 3% last year, but a couple of borderline cases might be forgiven due to mitigating factors, according to people familiar with the matter.

Belgium is likely to be among those reprimanded again by the Commission once it receives final data from Eurostat this month. Given the country's likely inability to fix that situation and the contrast with its peers, it may be a candidate for escalation such as fines, and increasing pressure to act.

Whether Belgium's political system can turn around the trajectory of its public finances will be a key test for the EU's new rules in years to come. Otherwise — just as with the US — scrutiny of its rising debt load will just keep mounting too.

“We need to avoid that someone else is going to say what we need to do — and that is important,” Finance Minister Vincent Van Peteghem said in an interview last month. “We need to do these reforms.”

Source: Bloomberg

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Warren Takunda

Economic

The northern French port of Dunkirk, riding an industrial mini-boom thanks to a state-backed investment push, is a showcase for President Emmanuel Macron's belief that fighting unemployment is the best way to curb support for the far-right.

But the economic potential of two new EV "gigafactories" will not stop locals like Killiams Pierron backing Marine Le Pen's nationalists in June elections to the European Parliament, after a surge in prices for food, heating and other essentials.

"Bread, cheese, butter, it's all gone up," construction labourer Pierron told Reuters as he rode one of the region's free buses, listing the ingredients of a ham-cheese baguette roll he said had tripled in price to 4.40 euros ($4.75) after three years of high inflation.

"At some point you need to start thinking about the French before others," he said, arguing Macron should prioritise domestic issues like affordable housing rather than pursue support for Ukraine in its war against Russia.

Anger at falling living standards is shared by millions of Europeans and is expected to dent support for mainstream parties in the June 6-9 vote for the 720 lawmakers of the EU assembly, which helps set trade, green and other policy in the 27-nation bloc.

Since the last elections in 2019, the European economy has faced COVID-19 shutdowns and the cost-of-living crisis that was triggered by a global surge in inflation and made worse by energy price spikes brought on by the Ukraine war.

Massive state support to households and businesses helped it avoid a deep recession but - as in the United States, where robust economic data are not helping President Joe Biden's bid for a new term - Europe's incumbents will get little thanks for it.

"It is extraordinary how Europe has kept it together through these enormous shocks," said Jeromin Zettelmeyer, director of the Brussels-based Bruegel economic institute.

"But this resilience story is not something that makes you super-optimistic ... There is a sense of relative decline."

POVERTY RISK GROWS

At present, the mainstream parties, which hold sway both in the European Parliament and most national governments, broadly share a vision of an economy open to trading with the world as it pushes ahead with a net-zero green transition.

But that consensus is in jeopardy as more Europeans conclude that the economic status quo is not working for them.

Last year, European output managed to grow by a modest 0.5% with unemployment anchored around historic lows of 6.5%. But dig deeper and the data show how millions of Europeans - including those with jobs - are struggling with depleted finances.

As inflation surged through 2022 to hit nearly 11%, wages failed to keep up. As a result, the median European household saw its disposable income shrink by 2% over the year, with low-income groups hit harder, EU data show.

Economy Scars Voters in Run-Up to EU Election_1

Economy Scars Voters in Run-Up to EU Election_2

Inflation and living condition in 2022 Essential items drove European inflation to new heights

That left the share of people ranked by the EU as "at risk of poverty or social exclusion" at 21.6%, a 0.5% point rise from 2019, equivalent to 2.9 million people - the first increase in the category after a decade of year-on-year falls.

According to an annual study by German insurer R+V, the top three concerns of Germans are now tied to financial matters: higher living expenses, unaffordable housing and fears of cuts to social benefits as the government reins in spending.

"They are now simply worried about whether they can still make ends meet with the money they have," said Isabelle Borucki, politics professor at Germany's Philipps-Universitaet Marburg.

Variations of this are seen across Europe: in Spain, the fact that many home-owners are on variable-rate mortgages has left them exposed to higher interest rates. In Poland, the Credit Information Office (BIK) said a "state of uncertainty and tension" was turning Poles away from consuming towards saving.

In a continent which still tops global rankings for quality of life, three-quarters of Europeans believe their standard of living will worsen and over a third say they have trouble paying bills, the EU's regular "Eurobarometer" survey shows.

In particular, recent protests by European farmers against EU green rules and free trade have resonated with some voters. While surveys show a majority of Europeans back climate change action, many are also worried about the cost of doing this.

Inflation and living condition in 2022 EU persons at risk of poverty or social exclusion Economy Scars Voters in Run-Up to EU Election_3

CREDIBILITY ISSUE

How this reshapes the 27-country EU assembly will ultimately depend on other factors including local politics and what alliances are forged in the wake of the vote.

Pollster Ipsos sees mainstream parties of right and left coming out top in 16 countries. However, it also sees radical right groups making gains to control one fifth of EU parliament seats, with economic dissatisfaction a factor in those gains.

"It does not explain the rise of right-wing populism, it is just a factor that helps them even more," said Ipsos account director Mathieu Gallard, suggesting the rising cost of living had galvanized voters who already backed the far-right's nativist and identity agenda.

That is the case in France, where polls show Le Pen's Rassemblement national (RN) beating Macron's Renaissance party by over 14 points, coming from a neck-and-neck tie in 2019.

Elsewhere, the far-right's lack of experience in running economies is seen limiting their credibility and hence their appeal - for example in Germany where local conservatives are confident of seeing off the Alternative for Germany (AfD).

Much attention will focus on Giorgia Meloni's Brothers of Italy, which since gaining national power in 2022 has massaged Italians' sense of economic wellbeing with state handouts, including home improvement grants and heating subsidies.

It is seen making gains in the EU vote because many Italians are turning a blind eye to the fact that all the new borrowing - the highest in the EU - only adds to Italy's high debt mountain.

Giorgio De Rita of Italian socio-economic research body Censis warned that a "return to reality" on state finances could be abrupt, but acknowledged: "Right now, what Giorgia Meloni is telling voters is in tune with their emotional state."

Source: Reuters

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Swissquote

Economic

Central Bank

Stocks

Stocks on this side of the Atlantic Ocean are better bid these days than their American peers thanks to a combination of too-lofty valuations in the US, good corporate earnings from European companies and the expectation of looser monetary policies in Europe and the UK sooner than in the US. Plus, the AI rally – that's been boosting the major US indices – looks like it is losing momentum.

The Stoxx 600 and the FTSE 100 traded at fresh records yesterday, as the S&P500 stalled. Nvidia for example, hasn't hit a fresh record since March and AMD lost more than 30% since its March peak. Arm holdings, on the other hand, tanked 9% in the afterhours trading yesterday, after lowering its revenue and profit forecast for this fiscal year. Nvidia's earnings – due May 22nd – can't come soon enough to confirm or reject the fear that AI spending might start slowing. If that's the case, the US stocks will need the help of a favourable Federal Reserve (Fed) stance to hold ground near ATH levels, but the macroeconomic picture is – what it is.

Yesterday saw another Fed speaker, Susan Collins, echo that reaching the 2% inflation goal could take longer than previously, while Lisa Cook said that firms have ample earnings to cover their debt payments, that financial firms are well positioned to absorb shocks and that the commercial real estate risks are sizeable but manageable. All in all, she didn't sound like there is any sense of emergency for cutting the interest rates while inflation is comfortably stagnating above 3% in the US.

In Europe, however, things look different. The Swiss National Bank (SNB) lowered its policy rate in the Q1 due to a sufficient slowdown in inflation, the Riksbank opted for a 25bp cut yesterday, as expected, and said that there could be two more rate cuts this year, the European Central Bank (ECB) is expected to cut its rates when it meets in June, and the Bank of England (BoE) will – maybe – give more details on its plans to lower rates at today's MPC decision.

What's interesting is the European and Brits' determination to ease their monetary policies regardless of what the Fed will do despite the risk of seeing their currencies depreciate and re-boost the domestic price pressures. Yet the European policymakers' new slogan ‘data-dependent, not Fed-dependent' will seemingly keep them on a dovish diverging path as long as the dollar's appreciation remains manageable. For now, the undiscourageable Fed doves keep the dollar appetite contained. But as long as this focus on economy continues – which will require a steady slowdown in inflation – we shall see the European currencies continue to depreciate against the US dollar.

Zoom into the BoE

The BoE is not expected to cut its policy rate today, but the MPC is expected to agree less on when to cut rates. Four MPC members out of nine are sitting in the hawkish camp, Governor Bailey has shifted his stance from ‘it's too early to talk about cuts' to ‘the inflation dynamics between the US and UK are diverging'. Some see a small chance that the BoE could cut rates in June meeting, In tandem with the ECB. But a more realistic scenario is an August BoE cut.

Walking into the meeting, Cable trades in the bearish consolidation zone – below the major 38.2% Fibonacci retracement on October to March rebound, and unless we hear anything unexpectedly hawkish, there is no reason for it to reverse trend. Cable should continue to attract sellers near the 1.25 level into next week's US inflation report. Then, things will likely take a clearer turn.

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