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A multi central bank pivot increases chance of monetary policy divergence and life into FX markets

It’s a quiet week ahead following last week’s bonanza of central bank meetings. To my mind, it felt as if there was a coordinated dovish pivot and the first signs of divergence from the major central banks. A dovish vote split from the Bank of England, which in my view, plays negative for sterling. An unchanged dot-plot (which shows each participant’s estimate for the year-end interest rate) from the Fed, despite upwards surprises in US inflation data over January and February, which gives the decision a dovish feel. And finally, a first interest rate cut from a developed market central bank. The Swiss National Bank (SNB) easing interest rates by 25 basis points. Not forgetting the Bank of Japan ending their experiment with negative interest rates, hiking for the first time since 2007.

These decisions, specifically the SNB, go some way in breaking the narrative that major central banks need to wait for the Fed before lowering interest rates. Something which is key if FX markets are to breakout of their recent ranges, in my view.

A moderation in the US personal consumption expenditures price index deflator may support the Federal Open Market Committee’s decision to leave guidance unchanged

This week’s key release falls on the Friday Bank holiday when personal consumption expenditures price index (Core PCE) data are published, the Fed’s favoured measure of inflation. NatWest Economists forecast the Core PCE deflator to rise by 0.3% in February from 0.4% in January, which would likely leave the year-on-year pace at 2.8%. 

Following the interest rate decision, Fed’s Chair Jerome Powell noted that the central bank is also assuming the core came in at 2.8% year-on-year in February, so a realisation of this estimate may not provide new information for policymakers to consider and consequently, may have a limited impact on the near-term policy outlook. Therefore, the USD reaction to this outcome could be limited, in my view. 

NatWest economists expect inflation to show clear signs of moderation from here and a June rate cut remains their central scenario.  In my view, US economic surprises have peaked, consumer confidence index and Chicago Purchasing Manager’s Index (PMI) may lend support to this view.  I think the case for the Fed to begin easing in June will likely strengthen over the spring, and with it I continue to favour EUR/USD upside. 

UK Gross Domestic Product the only standout in an otherwise empty UK data calendar

The UK data calendar is light this week with Gross Domestic Product (GDP) growth and Current Account data the main releases. NatWest Economists expect quarter-on-quarter growth of -0.3% in line with consensus. They forecast the UK’s Current Account deficit to widen to -£21.2bn, -3.1% of GDP, in Q4 2023 from -£17.2bn, -2.5% of GDP, in Q3. Given the UK’s historic current account deficit, a slight deterioration is unlikely to impact FX markets. However, FX is a relative asset class, therefore Sterling may take its lead from activity elsewhere.

In Europe, the key data to monitor this week include Euro area economic sentiment, national ‘flash’ Harmonised Index of Consumer Prices (HICP) inflation prints in Spain, France and Italy. As well as German Growth from Knowledge (GfK) and France consumer sentiment surveys along with Italian economic sentiment. 

NatWest Economists expect national inflation to moderate and euro area economic sentiment to improve on the month, though remain below its long-term average as manufacturing sentiment continues to look gloomy. 

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