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A blockbuster 36 hours of central bank meetings from the Fed, BoE and BoJ

The Federal Reserve’s (Fed) decision on Wednesday is likely to take centre stage in 36 hours that also sees interest rate decisions from the Bank of England (BoE) and Bank of Japan (BoJ).

According to Bloomberg, markets unanimously expect Wednesday to mark the start of the Fed’s easing cycle. But there remains considerable uncertainty about whether it will start with a 25 basis point (bp) or 50bp cut. The NatWest US economics team expects the former. To my mind, a primary driver of the USD has been the trajectory of interest rates set by the Fed. Therefore, the decision to ease policy, even by a series of 25bp cuts, represents a change in that trajectory. 

Ahead of the decision, watch out for US retail sales released on Tuesday afternoon.

A potential 7-2 vote to keep interest rates on hold is likely to support

It’s a busy data calendar in the UK, with the BoE’s interest rate announcement being the main domestic event. The NatWest UK economics team expects the Bank to leave interest rates on hold this week. We expect a 7-2 vote in favour of unchanged interest rates. This may support GBP on relative yields, especially with the European Central Bank (ECB) having already eased and the Fed expected to follow suit.  

Also watch out for inflation data on Wednesday, where our economists expect a partial rebound in core and services inflation. Retail sales data on Friday may also be essential viewing as it provides a timely update on the strength of the UK consumer. Our NatWest UK economics team forecasts total sales volumes to rise 0.4% month on month in August, marginally above the Bloomberg consensus (0.3%).

A light European events calendar leaves the EUR at the mercy of events elsewhere

The data calendar in the euro area is light this week following last week’s decision to reduce the deposit rate to 3.5%. But watch out for German ZEW expectations survey and final euro area inflation data. With the ECB more confident that inflation is heading towards the target, economic activity data, such as ZEW expectations survey, may become an increasingly important factor in determining the speed of interest rate cuts.

In my view, a faster pace of easing may weigh negatively on the EUR given the historical correlations with interest rate spreads.  

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