Monetary policies in focus, hawkish Bank of England

During yesterday's press conference, Christine Lagarde tried to suppress market expectations for an interest rate cut, which she succeeded to some extent. This was reflected in the strengthening euro exchange rate. At the same time, the president of the ECB expressed optimism about the inflation prospects.

Interest rates in the euro zone remained unchanged once again. The BoE sounded hawkish and strengthened GBP. In turn, the Swiss franc lost and the Norwegian krone gained significantly, which was the result of the restrictive attitude of Norges Bank.

The ECB will remain vigilant

Before yesterday's meeting, financial markets had fully priced in the first interest rate cut. by 25 basis points in March 2024. In total, cuts of 150 basis points were expected by the end of next year. Such an interpretation representatives of the European bank did not like it. The suppression of these speculations turned out to be effective and effective EUR / USD exchange rate increased almost to the level of 1,10 and equaled the peak set at the end of November.

Lagarde no longer said that inflation would remain "too high for too long." She also explained that, unlike the Federal Reserve, the ECB Governing Council did not discuss interest rate cuts yesterday. She also stressed strong wage growth, which is driving domestic inflation, and that the ECB will not lower its guard.

During the conference it was also emphasized that base measure inflation has recently been lower than forecast. While answering questions, the ECB president did not repeat the statement that rates would remain at their current level for several quarters. The bank forecasts that inflation and the core index will fall to the target of 2% over the forecast horizon. The latest lower CPI readings from the euro zone (2,4% y/y) are the result of, among others, lower prices for services.

Nevertheless, inflation declines will be limited by still strong wage growth, which the ECB recognizes interest rates will likely remain at elevated levels longer and the first cut is likely to take place later than the start of the easing cycle planned by the Federal Reserve.

Strengthening of the British pound

The pound sterling also had a good session. As expected, the Bank of England left interest rates unchanged yesterday (5,25%). More importantly, unlike the Fed, continued to emphasize the risk of inflation. GBP/USD pair rose to the highest level since August this year. and established a local peak around 1,2790. The BoE did not attempt to use the significant decline in inflation as an opportunity to abandon its cautious stance.

Governor Andrew Baily acknowledged that it is not yet possible to say with complete certainty that interest rates have peaked. At the same time, he openly admitted that there was no discussion in the BoE about cuts because it is still too early for such a move to ease monetary conditions. The market perceived the decision and the words of the bank's president as definitely "hawkish", which strengthened the valuation of the pound.

The Swiss franc lost (mainly to the euro) after the decision SNB on maintaining the cost of money at the same level of 1,75 percent. SNB President Thomas Jordan noted yesterday that the central bank "is no longer focused on selling foreign currencies." In the second quarter, the institution to artificially support CHF sold foreign exchange reserves worth over CHF 40 billion. The bank's inflation projections have been lowered and are now approaching the SnB's target range of 0-2%. Yesterday, the EUR/CHF rate increased at the time of the decision, and the increases accelerated in the afternoon when the ECB took the floor.

In turn, Norges Bank remains very restrictive. Interest rates in Norway were raised by 25 basis points to 4,5%. Moreover, according to institution representatives, they will probably remain at this level for some time - until autumn 2024. Further increases have not been fully ruled out. At the same time, the scenario of earlier reductions has not been ruled out if the Norwegian economy slows down significantly or inflation drops more than the projections indicate. The decline in the EUR/NOK exchange rate to 11,50 was decisive and dynamic. The ECB press conference did not manage to permanently increase the exchange rate and currently the quotations are within yesterday's lows.

Source: OANDA TMS Brokers