As widely expected, the ECB kept its key interest rate unchanged at the first policy meeting of the year, with President Christine Lagarde pushing back on the markets aggressive pricing of early rate cuts. When questioned about the timing of cuts, she said, “I stand by what I have said”, referring to previous suggestions that the central bank remains data dependant and that summer cuts are likely. She added “We stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term target, and to preserve the smooth functioning of monetary policy transmission.” As regularly occurs, rates markets have been pricing in aggressive early cuts, with swaps pricing an April move by the ECB, despite ongoing caution from central bank officials who have previously stated that cuts were not even discussed at the last policy meeting.
Solid US data released yesterday suggests that a soft landing is on the horizon after GDP QoQ came in above consensus at 3.3% versus expectations of 2.0%, helping to boost the US dollar against its G10 peers. Both the pound and the euro slipped against the greenback, with EURUSD dropping below the 200-day MA which has provided solid support to consolidate around 1.0820 at the time of writing. GBPUSD also lost ground, falling below the psychological 1.27, with markets expected to tread water this morning ahead of key US data this afternoon. The Personal Income and spending data, which is the Fed’s preferred inflation gauge is likely to provide encouraging inflation news for the Fed ahead of next week’s FOMC policy meeting.
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