With the European Central Bank (ECB), the Federal Reserve in the US and the Bank of England “firmly in pause territory, any monetary policy enacted by them will have little or no impact at present,” said a senior market commentator.
“FX markets appear to be in no man’s land at the moment,” he said, pointing out that euro/pound implied volatility metrics were at their lowest level in over 16 years.
US January inflation data will be released on Tuesday, followed by UK inflation data on Wednesday. They will provide more data points and probably trigger more speculation, but the impression is that whenever the downturn begins, central banks will tread cautiously.
The median speculation is that the ECB's rate cuts will begin in June and that Frankfurt will cut rates three times this year.
“As far as ECB policy is concerned, we expect rate cuts to begin in June and be slower this year (75 basis points) but faster (100 basis points) in 2025 than priced in, as fears of persistent inflation gradually fade be dispersed,” Investec said in a recent note.
“The better news is that inflation has fallen faster than the ECB expected and that the labor market is still robust. Assuming both factors remain in place, rising real incomes should lay the foundation for faster growth later in 2024 and 2025, reinforced in due course by interest rate cuts that will incentivize more investment,” it said.
ECB chief Christine Lagarde fueled speculation that interest rates could be cut soon, possibly in April, and signaled last month that wage growth was showing signs of slowing.
Policymakers feared from the start that the rise in inflation could be prolonged by workers demanding higher wages to offset the decline in real wages.