Sterling rises after BOE policy decision

Important calendar events

• JPY: National Core CPI
• GBP: GfK Consumer Confidence, Public Sector Net Borrowing
• EUR: Current Account, Consumer Confidence

USD

The dollar rallied on Thursday, and the index rose from 103.5 to 103.8. US treasury yields remained steady, with the US 10-year bond yielding approximately 4.24%. 

The US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday. FOMC policymakers voted unanimously to maintain the federal funds range to a target range of 4.25% to 4.50%. Policymakers remained cautious and kept interest rates steady under a climate of economic and inflationary statements. 

The Fed, however, updated its ‘dot plot’, which is a summary of the central bank’s economic projections and reflects the central bank’s rate outlook. The latest FOMC dot plot indicated that FOMC members expect interest rates to reach a median value of 3.9% in 2025. This suggests that policymakers expect to deliver approximately two more rate cuts this year of 25 basis points each, raising market expectations of future rate cuts. Market expectations of rate cuts in 2025 are currently mixed. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. The Fed also revised its economic projections, with US GDP estimated to drop to 1.7% in 2025, down from a previous estimate of 2.1%, while the unemployment rate is expected to reach 4.4% by the end of 2025, up from a previous projection of 4.3%.

Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, stating that the central bank is not in a hurry to lower interest rates. Powell cited economic instability and elevated inflation risks due to trade tariffs as the reasons behind the Fed’s decision to keep interest rates steady. 

On the data front, US Unemployment Claims released on Thursday rose to 223K for the week ending March 15, up from 221K the week before. 

Industrial Production in the US expanded by 0.7% in February according to data released on Tuesday, after rising by 0.3% in January, beating market expectations of 0.2% growth. Retail Sales on Monday fell short of expectations, raising concerns over the health of the US economy. Retail Sales rose by 0.2% in February after contracting by 1.2% in January but missed market expectations of 0.7% growth. Core Retail Sales, which exclude the sales of automobiles, rose by 0.3% in February, after dropping by 0.6% in January, which was in line with expectations.

Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate down from 3.3% in January.

Preliminary GDP data showed that the US economy expanded by 2.3%, following a 3.1% expansion in the third quarter of 2024 and falling below market estimates of 2.7% growth. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter.

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened to impose reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners. Markets this week will continue to focus on Trump’s economic policies and trade tariffs and Trump’s statements are likely to cause volatility in the price of the dollar. 

Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries. Trump’s economic policies are raising concerns that the US economic growth will slow down. Many analysts are already expressing concerns that the US will enter a recession. 

TRADE USD PAIRS

EUR 

EUR/USD dipped from 1.090 to 1.085 on Thursday as the dollar gained strength. If the EUR/USD pair declines, it may find support at 1.080, while resistance may be encountered near 1.095.

The ECB lowered its benchmark interest rate by 25 basis points at its latest policy meeting, bringing its main refinancing rate down to 2.65% from 2.90%. In her speech after the policy meeting, ECB President Christine Lagarde reiterated her former statement that the central bank’s policy will remain data-dependent and warned that the ECB will need to stay vigilant in these uncertain times. 

Lagarde testified before the Committee on Economic and Monetary Affairs of the European Parliament on Thursday. In her testimony, Lagarde stressed the ECB's commitment to lowering inflation in the Eurozone sustainably to the central bank’s 2% target. Lagarde also stressed, however, that US trade tariffs and retaliatory measures could raise inflation by approximately half a percentage point.

Hopes of political stability in Germany are boosting the Euro. Germany is the Eurozone’s leading economy and an official government has not yet been formed after the German Federal elections in February. It seems likely, however, that Germany’s conservatives led by prospective Chancellor Frederich Merz and the Social Democratic Party will form a coalition. The leaders of the two parties have agreed on a restructure of Germany’s debt that will widen the country’s borrowing limit, and boost defense spending and economic growth. The historic debt reform was finally passed by the German Parliament on Tuesday, boosting the Euro. Germany's Bundestag has finally approved Merz’s plan and has voted to reform the country’s debt.

On the data front, the German ZEW Economic Sentiment Index rose to 51.6 in March from 26 in February, exceeding market expectations of 48.1, indicating improved economic sentiment in Germany. The Eurozone ZEW Economic Sentiment Index rose to 39.8 in March from 24.2 in February, beating market expectations of a 39.6 print.

Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

Final CPI data on Wednesday showed that Eurozone inflation rose to 2.3% year-on-year in February after rising by 2.5% in January, against a previous reading of 2.4%. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January.

TRADE EUR PAIRS

GBP 

GBP/USD plummeted from 1.300 to 1.293 in early trading on Thursday but pared some losses after the BOE policy decision, climbing back to 1.296. If the GBP/USD rate goes up, it may encounter resistance at 1.304, while support may be found near 1.291.  

BOE policymakers kept interest rates steady in March and the Official Bank Rate was maintained at 4.5%. MPC members voted 8-1 to keep rates on hold with only one member voting for a 25 basis point rate cut. 

Bank of England Governor Andrew Bailey stressed that there is a lot of uncertainty at the moment but still thinks that interest rates are on a declining path. The BOE currently anticipates that the British economy will grow by 0.25% in the current quarter, up from 0.1% previously.

On the data front, labor data released on Thursday showed that the British Unemployment Rate stayed unchanged at 4.4% in the three months to January. The number of people claiming jobless benefits increased by 44.2K in February, compared with a 2.8K rise in January. Meanwhile, Average Earnings rose by 5.8% in the three months to January after rising by 6.1% in the three months to December. 

The British economy contracted unexpectedly by 0.1% in January after expanding by 0.4% in December, missing expectations of 0.1% growth. Preliminary GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1% against estimates of 0.1% contraction and following economic stagnation in the third quarter of 2024.

Price pressures in the UK are rising, reducing the odds of a BOE rate cut in February and putting pressure on the Sterling. Headline inflation in the UK rose by 3.0% annually in January up from 2.5% in December, against expectations of a 2.8% print. Core inflation, which excludes food and energy, rose by 3.7% year-on-year in January from 3.2% in December, which was in line with expectations.

TRADE GBP PAIRS

JPY

USD/JPY edged higher on Thursday, rising from 148.5 to 148.8. If the USD/JPY pair declines, it may find support at 147.4. If the pair climbs, it may find resistance at 150.1. 

The BOJ held interest steady at 0.50% on Wednesday, as anticipated. BOJ Governor Kazuo Ueda stated that the central bank will keep adjusting the degree of monetary easing to support the country’s economy. Ueda stressed, however, that inflation in Japan remains below the BOJ’s 2% target, lowering rate hike expectations and boosting the Yen. 

Markets anticipate that the BOJ will raise interest rates at least one more time this year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%. 

Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter. 

Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan rose by 3.2% year-on-year in January from 3.0% in December against expectations of a 3.1% print. In addition, BOJ Core CPI rose to 2.2% year-on-year in January from 1.9% in December.

TRADE JPY PAIRS

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

Share the article: