- Data released this morning showed that the UK’s inflation rate fell more sharply than economists were forecasting, to the lowest level in over two years. The Consumer Price Index rose 3.4% in February, significantly lower than the 4% print in the month before and lower than the 3.5% predicted by economists and the BoE. The core measure excluding energy and food fell in line with expectations to 4.5% from 5.1%, with markets expecting a further drop in prices next month. Policymakers on the MPC will be relieved to see that inflation is moving in the right direction, however a shift in policy at tomorrow’s meeting remains highly unlikely. Rate setters will likely want to see April’s inflation and wages data before considering a cut in interest rates as markets expect a significant fall in energy bills and a wave of pay settlements. The pound has whipsawed after the data release, with GBPUSD initially dropping before recovering a touch, with cable currently trading in the low 1.27’s.
- The attention shifts back to the US this afternoon as we await the results of the Fed’s policy meeting. Officials are expected to keep rates unchanged, however all eyes will be on the updated ‘dot plot’ and Chairman Jerome Powell, to see if he can provide any guidance on the timing of rate cuts. Markets are currently pricing in three reductions of 25 basis points, but there is a possibility that the ‘dots’ will point to just two cuts with policymakers remaining vigilant to confidence, inflation, and the labor market.
- Elsewhere, the Japanese yen was the biggest mover in FX markets yesterday, with USDJPY rallying to 151.58 and the yen falling to its lowest level against the single currency since 2008. This follows yesterday’s rate increase from the BoJ after it ended the world’s last negative interest rate policy.
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