forward guidance

Market stability has remained in place in all major submarkets (FX, bonds & swaps). Although the forint has been weakening in recent days, the exchange rate against the euro has not hit a critical level that could prompt the central bank to back down. Nor do we see any grey clouds hovering over global financial markets that could darken the future. This is certainly a significant help, as it continues to mean a constructive investment environment overall. In addition, the major central banks (Federal Reserve, European Central Bank) have not surprised markets in any meaningful way, which would be drastically countered by the easing of the Hungarian central bank.   Hungarian yield curve   We don't expect any substantive change in the tone of the press release and the expected press conference. The National Bank of Hungary will continue to define the series of interest rate cuts as a function of market stability and remain committed to the principles of gradualism and prudence. Obviously, the central bank will underscore the acceleration of disinflation as a significant factor, but we think that the Monetary Council will still not want to make any substantive comment on a possible cut in the base rate soon. In other words, the sound distinction between market stability and price stability will remain. The forward guidance is, therefore, unlikely to change in light of this.   ING's inflation and base rate forecasts for Hungary   Looking further down the road If the supportive environment remains and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100bps. Accordingly, the base rate and the effective rate should merge at 13% at the September rate decision, in our base case. As to whether the rate cuts will resume immediately from here or whether there will be a pause, we will only be able to say with a high degree of certainty once we have seen market conditions and the inflation situation in the autumn. At the moment, we would give a higher probability to a pause of one or two months after September. When we see that inflation has fallen to single-digit levels (which could happen as early as November, so the NBH can make a decision in December with this in mind), then the base rate cut will start.

HUF: Weaker levels are an opportunity for the market Today, the only major event in the CEE region is the meeting of the Hungarian National Bank. Indicators of external balances are improving, while disinflation accelerated in May. This looks like a perfect setup for a “copy-paste” decision. We see 100bp of cuts to the top-end of the interest rate corridor and to the overnight quick deposit rate. The forward guidance and the tone will remain unchanged as well, in our view. This means that the approach remains cautious and gradual and the decisions ahead are still data and sentiment driven with the base case. The Hungarian forint has been trading above 373 EUR/HUF for the last few days, the weakest since April. However, the main driver seems to be the current jump in gas prices. However, these have been falling again in recent days. Moreover, we think the market likes the normalisation story of monetary policy in Hungary, which will again attract the market to buy the forint. By far the highest FX carry in the region is still a key benefit here and we expect weaker forint values to offer an opportunity for the market to build long positions again. Overall, we thus expect the forint to return to 370 EUR/HUF, which is near the lower end of the 368-378 EUR/HUF range we expect for the rest of this year.

In this article, we engage in a conversation with analyst Patrick Reid to discuss the potential impact of the Bank of England's interest rate decision on GBP quotes. We also explore the Turkish central bank's upcoming interest rate decision and its potential effect on TRY quotes. Additionally, we analyze the latest PMI readings in the US and Europe, examining whether they indicate the possibility of a "hardset landing." Lastly, we delve into the consolidation of US 10-year bond yields after a strong two-year uptrend and speculate on what might lie ahead based on factors such as the Terminal Rate and US macroeconomic conditions.   FXMAG.COM: How will Thursday's (22.06) Bank of England interest rate decision affect GBP quotes? Patrick Reid:The rate hike is fully priced in so the Forward Guidance on Future hikes is crucial to watch. We had a very hawkish FED which the market didn't tend to believe followed by an ECB indicating more hikes in July.  With regards to The BOE I feel trust is coming back but the market needs to be ready for more hikes. We have sticky Core Inflation and a mortgage crisis about to blow up. FXMAG.COM: How will Thursday's (22.06) Turkish central bank's decision on interest rates affect TRY quotes? Patrick Reid:I feel Turkey needs rates above 20% as the new appointment of senior officials to the Central Bank has not done much to stop its decline.      FXMAG.COM: What do the latest (23.06) PMI readings say about the US and European economies? Do they signal the possibility of a " hardset landing " in America and the Old Continent? Patrick Reid:ISM has been weaker in The US as of late but Friday will be key - especially for European PMI's. USD is consolidating at the yearly lows so i fell we will need a big beat of miss for this to change     FXMAG.COM: For several months, US 10-year bond yields have been consolidating after a 2-year robust uptrend, what's next?  Patrick Reid:It all depends on The Terminal Rate and US macro. I do not see 2 Year getting above 6% this year unless inflation goes higher and GDP doesn't get much weaker.  

Merger to finalise by September If the environment remains supportive and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100bps. In our base case, the base rate and the effective rate should merge accordingly at 13% at the September rate decision. There was a minor tweak to the forward guidance in the latest press release, with the term “prolonged period” being dropped as the Monetary Council assessed that maintaining the current level of the base rate will ensure price stability. We believe that this tiny shift might be the first hint that, following the expected merger of the effective rate with the base rate in September, easing will continue without a pause. In our assessment, this would be roughly in line with recent market pricing.   Our market views The Hungarian forint is gradually normalising following the sell-off two weeks ago, which affected the whole region. We see global momentum and market overvaluation as the main reasons as local conditions improve. The market sell-off has likely lightened the heavy long positioning and we believe the massive carry will once again attract market interest. In addition, we think the market is pushing NBH to cut rates at a faster pace and the hawkish tone should be a boost going back to EUR/HUF 370. In the rates space, we see that the very short end of the IRS curve has moved significantly lower in recent weeks due to the market wanting to see a more dovish central bank in the face of better macro numbers. However, our base case is that the NBH will not move away from the set course and these bets will be disappointed. In general, we see more steepening of the curve in the 2s10s spread, but a very short end. The FRA curve should see some repricing up this week, resulting in flattening in this segment. Hungarian government bonds (HGBs) eased in July and the rest of the region caught up with the swift rally. We therefore see current valuations of HGBs as more justifiable, which could attract new buyers. Despite the fiscal slippage risk, YTD issuance has reached 60% by our calculations, which we see as more than sufficient. Moreover, recent government measures supporting HGBs and the fastest disinflation in the region should be enough to sustain demand.

HUF: No change in NBH's policy easing pace The National Bank of Hungary (NBH) is scheduled to meet today. We expect the central bank to continue the normalisation of monetary policy despite recent market volatility, especially in the forint. At its June meeting, the central bank made a slight rebalancing in the order of factors that are affecting monetary policy. The updated forward guidance now puts the effects of international financial market developments on the domestic risk environment first, followed by incoming macroeconomic data and developments in the inflation outlook. All things considered, we expect the central bank to replicate the decision it made last month and cut the quick deposit tender rate by another 100bp, bringing the effective rate to 15%. Similarly, we anticipate 100bp cuts to the one-day FX swap tender and the overnight repo rate. The Hungarian forint is gradually normalising following the sell-off, which affected the whole region. We see global momentum and market repricing as the main reasons for forint weakness as local conditions improve. The market sell-off has likely lightened the heavy long positioning and we believe the massive carry will once again attract market interest. In addition, we think the market is pushing NBH to cut rates at a faster pace and thus the hawkish tone should be a boost going back to 370 EUR/HUF.

FX Daily: Fed patience provides breathing room for risk assets The market reaction to last night's FOMC statement was a mildly positive one, as Chair Powell's acknowledgement that the Fed could afford to be a little patient saw US yields and the dollar soften slightly. Today, all eyes will be on the ECB, where a 25bp hike is widely expected along with the door being left open for another hike in September.   USD: A little early to chase the dollar lower In the end, the dollar tracked US yields and marginally softened after yesterday's FOMC rate decision and press conference. Fed Chair Jerome Powell delivered another credible performance, and it seemed that markets – perhaps because of positioning – latched onto comments that the Fed "could afford to be a little patient" as a result of all the tightening implemented so far. US two-year yields edged some 7-8 bps lower, and December 2024 futures contracts priced Fed Funds some eight ticks lower at 4.07%, embracing five 25bp cuts in 2024. One of the clearest messages coming through from the press conference was that Chair Powell felt the Fed was "not in an environment where we want to provide a lot of forward guidance". In other words: listen to the data, not the Fed. On that subject, he highlighted that by the time of the next meeting on September 20th, the Fed would have two new CPI reports, two new job reports, and the Employment Cost Index (which will be released tomorrow).  While the dollar is a little lower today post-Fed, we would not chase the move just yet and prefer to take our cue from the data, starting with tomorrow's ECI. As we discussed in our FOMC review, the carry trade environment will still be popular and with overnight deposit rates at 5.25%, the dollar is clearly not a funding currency. Beyond the ECB meeting today, the US calendar should see some downward revisions to second quarter GDP, durable goods orders, and initial jobless claims. Of these, claims might be the most important given the ongoing need to see tight conditions ease in the US labour market. Barring any hawkish surprise from the ECB today, DXY should trade within a 100.60-101.20 range.

Eurozone core inflation surprises on the upside Eurozone GDP accelerates to 0.3% The euro is showing little movement on Monday. In the North American session, EUR/USD is trading at 1.1023, up 0.06%. It has been a wild ride for the euro over the past two weeks. On July 18th, EUR/USD hit its highest level since February 2022, but the same day, the euro began a slide which saw it drop almost 300 points. Interestingly, the euro had a muted reaction to Monday’s eurozone inflation and GDP reports. Eurozone inflation for June was within expectations. Headline CPI dropped from 5.5% to 5.3% y/y, matching the consensus estimate. Core CPI remained steady at 5.5%, a notch higher than the consensus of 5.4%. Core CPI, which is closely watched by the ECB, hasn’t improved much from the 5.7% gain in March, which marked a record high. The inflation report shows that inflation remains stubbornly high, and will provide support to ECB members who favor a rate hike at the September meeting. The ECB raised interest rates last week, which came as no surprise as the ECB had signalled that it would do so. What happens next is anyone’s guess. ECB Lagarde said at last week’s meeting that “the September meeting will be deliberately data-dependent”. This didn’t clear up any uncertainty or really say anything, as the ECB has abandoned forward guidance and made rate decisions based on key data, especially inflation and employment reports. The ECB could go either way in September – inflation remains well above the 2% target, which would support a hike, but the eurozone economy remains weak and some members may wish to pause in order to avoid a recession. There was a bright spot in Monday’s releases as eurozone GDP rose to 0.3% in the second quarter, up from 0.0% in Q1. We’ll get a look at German and eurozone Manufacturing PMIs on Tuesday. EUR/USD Technical EUR/USD is testing resistance at 1.1037. The next resistance line is 1.1130 There is support at 1.0924 and 1.0831    

Bank of England opts for smaller rate hike after better inflation news The Bank of England is keeping all its options open on future rate hikes, although another rise in September seems highly likely. Whether that's repeated in November is a more open question, particularly if services inflation starts to fall more noticeably between now an.   Bank of England reverts back to a 25bp hike Better news on inflation has, as expected, enabled the Bank of England to pivot back to a 25 basis-point rate hike this month. That follows a more aggressive 50bp hike back in June. Policymakers clearly don’t want to come across as complacent though, and there are plenty of references to the upside risks associated with inflation, as well as the recent surprises in wage growth. We shouldn’t be too surprised then that the Bank isn’t offering up much on what it intends to do next. The BoE retained its forward guidance that says it could hike again if “evidence of more persistent pressures” shows up in the inflation figures. This is the same phrase it has used all year and is sufficiently vague to keep various options on the table for September and beyond. That said, there are a few hints that we might be nearing the top for policy rates. Interestingly, the Bank now formally says that policy is restrictive, which seems to be a new addition to the statement – as is the line about policy needing to stay “sufficiently restrictive for sufficiently long”. At a pinch, you could argue this is the Bank laying very early groundwork for a pause later in the year, though we’re at risk of overanalysing. Meanwhile the new forecasts, even accounting for the Bank’s upside skew that it applies to what its models are churning out, show inflation at (or even a tad below) target in a couple of years’ time. Curiously, that’s also the case under the assumption that Bank Rate stays unchanged at its new level over the coming months. That said, the Bank’s forecasts have been pointing to sub-target inflation for some time now, and policymakers don’t appear to be putting a lot of faith in what their models are currently predicting.   So what next? Another hike in September seems likely, but by November we think the news on services inflation and wage growth should be looking a little better. The former has risen in no small part because of higher energy bills, and, according to ONS surveys, the pressure on service sector companies to aggressively raise prices is abating. Whether or not we get another 25bp hike in November will therefore largely depend on whether services inflation has failed to slow, but our base case for now is that 5.50% in September will mark the peak for Bank Rate. Market pricing of a peak at 5.65% around the turn of the year therefore seems fair – and certainly much more reasonable than it did just a few weeks ago when investors briefly saw peak Bank Rate near 6.5%.   UK markets read the statement on the less hawkish side Today’s MPC statement and accompanying material have seen sterling sell-off around 0.5% and the UK 2-10 year Gilt curve steepen by around 7-8bps, led by declining yields at the short end of the curve. As above, investors seem to have read something in either the statement or the CPI forecasts suggesting that the Bank Rate may not need to be hiked as high as 5.75% after all. As discussed in our BoE preview, we expect the general direction of travel for EUR/GBP to lie towards the 0.88 area later this year as evidence builds that rates may in fact peak at 5.50%. We still like a higher GBP/USD on the back of the softer dollar story – but that does rely on both US inflation and activity showing a marked deceleration over the coming months. We currently see GBP/USD ending the year just above 1.30. Gilt price action today comes amid unsettled conditions at the long end of the US Treasury market.  A steeper curve does seem to make the most sense, if investors do continue to question whether the Bank Rate makes it to 5.75% and also while the US fiscal situation, plus rising Japanese government bond yields, keep the long end of core bond markets under pressure. Currently, we have a year-end 10-year Gilt target of 3.80% – but that requires a lot of things to go right.

National Bank of Hungary preview: The moment of truth With the expected merger of the base and effective rates next month seemingly a done deal, the time has come to think ahead. We see the National Bank of Hungary (NBH) using its meeting next week to manage market expectations for monetary policy in the fourth quarter. Plus, we expect an effective rate cut of 100bp.   The story hasn't changed We see no reason for the National Bank of Hungary (NBH) to change its recent monetary strategy. Even though the Hungarian forint has shown a lot of sensitivity to global factors, it has managed to remain in a roughly acceptable range since the central bank's July rate-setting meeting. The recent gravity line of 382 in EUR/HUF, combined with the settled rate cut expectations of the market, make the upcoming choice of the Monetary Council an easy one.   CEE currencies vs EUR (end 2022 = 100%)   Since we are still in phase one of monetary policy normalisation, where the effective rate is closing in on the base rate, the focus is mainly on market stability. Price stability issues will come to the fore when we enter the next phase of normalisation, after the merger of the effective rate and the base rate at 13% in September. This call is also telling in terms of our expectations for the rate decision next Tuesday. We think the National Bank of Hungary will cut the effective rate by 100bp to 14%, and we expect the O/N repo rate (the top end of the interest rate corridor) to be lowered by the same amount, reaching 16.5%. The central bank will replicate the 100bp rate cut in the FX swap tenders as well.   The main interest rate (%)   As this combination looks to be the market consensus by a wide margin, this outcome is unlikely to cause any surprises. What could be the wild card of the August meeting is the possible revelation of future monetary policy strategies. As a reminder, the Monetary Council’s pledge when it started the easing cycle was four-fold: Cautiousness. Graduality. Constant monitoring of market reactions and forward-looking rate expectations. Clear and forward-looking communication. If the central bank would like to live up to its pledges – which it has done so far – the August rate-setting meeting could be the perfect time to guide markets on what to expect after the September merger.   Moreover, as recent market history has shown that markets can be very volatile at the end of quarters and even more so at the end of the year, the National Bank of Hungary may use this rate-setting meeting to try to anchor expectations (and market rates) for the coming year-end.   The new era ahead requires an updated forward guidance What exactly the central bank’s new forward guidance will be we cannot predict. However, recent global risk-off scenarios (a US credit rating downgrade, Chinese property woes, energy-related issues related to threatened LNG worker strikes in Australia that could impact gas prices, the collapse of the Black Sea grain deal, plus talk of further interest rate hikes by major central banks – even if they don't materialise) are adding a lot of unwanted uncertainty. In this regard, we won’t be surprised if there is some extra hawkishness from the central bank, underscoring the need to be super-cautious in its second phase of policy normalisation. Such a speech could emphasise patience, leading to a possible (short) pause from September and/or a reduction in the pace of rate cuts. In contrast with the growing uncertainty of market stability, price stability seems to be less of an uncertainty, at least in the short run. Headline inflation peaked at 25.7% in January and sat at 17.6% in July. Thanks to the base effects and collapsing domestic demand, disinflation will speed up in the coming months with the reading falling close to or even below 10% as soon as October. Such sharp disinflation will result in a massive positive real interest rate environment as the fourth quarter arrives. This clearly opens the door to base rate cuts, especially given the record-long technical recession, which has stretched out to four quarters after a significant downside surprise in economic activity in the second quarter.     ING's inflation and base rate forecasts for Hungary   All of this will make the Monetary Council's decision on interest rates after September quite delicate. There are opposing forces, such as green lights on the inflation outlook and some red flags on the market stability outlook. This is the main reason why we think the National Bank of Hungary will strike an extremely cautious tone in its revised forward guidance. It might try to steer investors to the hawkish side, as this seems to be a safer bet for the central bank in this environment.

National Bank of Hungary review: Monetary policy to come off autopilot soon The National Bank of Hungary continued its normalisation in August with another 100bp cut in the effective interest rate. However, monetary policy is likely come off autopilot from September. The central bank believes that market expectations of rate cuts in the fourth quarter are exaggerated.   The National Bank of Hungary decided not to change the pace of normalisation in August. It cut the overnight collateralised lending rate (upper end of the rate corridor) by 100bp to 16.5%. More importantly, the central bank announced that from 30 August the interest rate on overnight quick deposit tender will be cut to 14%. This is an effective rate cut of 100bp. There will be a similar change in the overnight FX swap tender rate. In general, these changes did not come as a surprise. The highlight of the policy event wasn't the decision itself, but the updated forward guidance and the corresponding communication. As we wrote in our preview note, the August rate-setting meeting provided a perfect opportunity for the central bank to manage market expectations for monetary policy in the fourth quarter. The Monetary Council took advantage of this opportunity. In this respect, the press conference contained the golden nuggets, with Deputy Governor Virág reiterating that monetary policy is entering a new phase of normalisation after the merger of the effective and base rates. This convergence is taking place in September and after which the second phase will involve a simplified monetary policy toolkit. In practice, this could mean, that the Monetary Council will get rid of the overnight quick deposit tender and rely on its traditional overnight deposit facility to mop up excess liquidity from the market. However, we can expect that the overnight FX swap tender and the central bank discount bill to remain part of the toolkit in the new phase. On the rate path, the Deputy Governor was quite vocal about the rate cut expectations priced in by investors. While the central bank agrees with the view that the convergence will take place in September (so we can expect a final 100bp cut to end phase one), it disagrees with what has been priced in afterwards. The central bank sees market expectations as exaggerated and emphasises that monetary policy will come off autopilot in the second phase of normalisation. Decisions will be data-driven and made on a step-by-step basis, considering market stability and inflation risks. In our view – based on market expectations ahead of the meeting – this means in practice that the NBH is either suggesting smaller steps in future cuts and/or adding the pause to the mix of decisions. Nonetheless, the pushback against “excessive expectations” is a clear hawkish message. The September rate-setting meeting will be important because of the new Inflation Report, which contains the central bank’s updated macro outlook. Regarding the GDP outlook, the NBH sees downside risks materialising. However, inflation has been identified as the main culprit behind the collapse in domestic demand and weak economic activity. Against this backdrop, the main weapon to steer the economy onto a favourable growth path is through tight monetary conditions, positive real interest rates and thus faster consolidation of inflation. Another hawkish message.   Strategy in a nutshell Today's meeting has a lot to calm the nerves of HUF bulls. All hawkish messages from the central bank point to a higher interest rate path than the market's latest expectations. This means that the relative carry opportunity is improving, supporting the forint. The central bank's commitment to continue fighting inflation and maintaining a positive real interest rate environment is also helpful not only from a tactical but also from a strategic perspective. All in all, we remain positive on the HUF. The initial market reaction was clear and if the directional move remains intact, it may be satisfactory for monetary policymakers. The 6x9 month FRA rose 6bp on the comments, although we admit that this is still relatively modest, so we see some room for further correction. However, with the NBH willing to be data dependent, the rate market may be even more data sensitive than just reacting to central bank comments. The next test will be the incoming August inflation print on 8 September. If we see a higher-than-consensus inflation print – and we see a chance for an upside risk here mainly in services and fuel – then it can really shake the market's pricing of an aggressive easing cycle.

GBP: Paring back of BoE hike expectations encouraging reversal of GBP gains The pound has continued to trade at weaker levels overnight after selling off yesterday following the release of the latest labour market report from the UK. It has resulted in EUR/GBP rising back above the 0.8600-level while cable is continuing to hold just above support from the 200-day moving average that comes in at around 1.2430. The pound has been undermined recently by the paring back of BoE rate hike expectations as we highlighted in our latest FX Weekly report (click here). The UK rate market has become less confident that the BoE will deliver multiple further rate hikes in the current tightening cycle. There are 19bps of hikes priced in for next week’s MPC meeting and 39bps of hikes by February of next year. It implies that the UK rate market is currently attaching around a 50:50 probability to the BoE delivering one final hike after next week’s 25bp hike which is viewed as almost a one deal. The main trigger for the paring back of BoE rate hike expectations have been comments from BoE officials including Governor Bailey and Chief Economist Pill who have signalled that the rate hike cycle is close to an end and that keeping rates higher for longer is preferred to the alternative of hiking rates further towards 6.00%. Next week’s updated forward guidance from the MPC meeting will be important in determining whether the BoE plans to deliver one final hike or is becoming more confident that it has raised rates enough   At the same time the recent data flow from the UK is helping to dampen BoE rate hike expectations as well. While yesterday’s labour market report did show average weekly earnings hitting a new high of 8.5% in July, the details of the report provided more encouragement that labour demand continues to weaken and wage growth is beginning to slow. Employment dropped by 207k and the unemployment rate ticked up further to 4.3% as it moved further above the cycle low of 3.5% from las August. Back in the August MPR the BoE had forecast the unemployment rate would rise to only 4.4% by the end of next year. Job vacancies also continued to fall and moved below 1 million. After stripping out more volatile bonuses, regular pay growth in the private sector has slowed in recent months coming. The HMRC’s median pay measure even declined by -0.5%M/M suggesting the peak has been reached for pay growth.   Furthermore, it has just been revealed that services sector growth was much weaker than expected at the start of Q3. After expanding by 0.5%M/M in June, service sector output contracted by -0.5% in July. It has reinforced the pound’s downward momentum  

Australia posts strong job gains, but mostly part-time jobs US retail sales and PPI accelerate, core CPI eases The Australian dollar climbed higher after the solid Australian employment release but has pared these gains following the US retail sales and producer prices reports. In the North American session, AUD/USD is trading at 0.6440, up 0.28%   Australia’s labour market flexes its muscles Australian job creation sparkled in August. The economy added 64,900 jobs, blowing past the consensus estimate of 25,000 and rebounding from a revised decline of 1,400. However, the gains were almost exclusively in part-time roles, with full-time employment rising by only 2,800. The unemployment rate remained unchanged at 3.7%. The Australian dollar responded by rising as high as 0.6454, a nine-day high. The Reserve Bank of Australia has held rates for three straight times and this has contributed to today’s positive employment numbers. The extended pause has raised expectations that the RBA is close to wrapping up its rate-tightening cycle, but given that inflation is at 6%, double the upper range of the RBA’s target, the door is still open for one more rate hike in the fourth quarter. New RBA Governor Michelle Bullock has said rate decisions will be made based on the data, which means the markets won’t be able to rely on any forward guidance from the RBA. US retail sales, PPI beat estimates US retail sales accelerated in August to 0.6% m/m, higher than the consensus estimate of 0.2% and a notch higher than the 0.5% gain in July. The main driver of the strong release was gasoline prices, which jumped over 10% in August (that increase was a key factor in headline inflation rising on Wednesday). Producer prices mirrored the August CPI data, with headline PPI rising while the core rate declined. PPI climbed 0.7%, higher than the July read of 0.4% and the market consensus of 0.3%. Core PPI dropped to 0.2%, down from a revised 0.4% in June and matching the consensus estimate. On an annualized basis, headline PPI rose from 0.8% to 1.6% (1.2% est.) while the core rate dropped from 2.4% to 2.2% (2.2% est.).   AUD/USD Technical AUD/USD tested resistance at 0.6453 earlier. The next resistance line is 0.6528 0.6405 and 0.6330 are providing support  

Bank of Japan keeps policy unchanged and sticks to dovish stance The Bank of Japan unanimously decided to keep its policy settings unchanged, but the result was a bit disappointing given that there wasn’t any clear sign of a shift in policy stance either from its statement or from Governor Ueda’s comments.   Sustainable inflation targeting is not yet in sight The BoJ’s statement maintained most of the wording from before and kept its forward guidance unchanged. Firmer-than-expected inflation is not yet enough for the BoJ to tilt its policy stance. In the statement, the BoJ expects inflation to decelerate and said core inflation has been around +3% because of pass-through price increases. At the press conference, Ueda said, “if inflation, accompanied by the wages goal is in sight, then the BoJ will mull an end to the YCC and a rate shift”. Taken together, the BoJ still thinks that higher-than-expected inflation is transitory and driven more by cost-push factors.   Yet inflation has been consistently beating the BoJ's expectation In our view, recent inflation data showed inflation to be more stable and stickier than expected and also showed signs of increasing both demand-side and supply-side pressures. The headline consumer price data for August rose 3.2% year-on-year (vs 3.3% in July, 3.0% market consensus) while core inflation excluding fresh food and energy stayed at 4.3% for a second month. Private service prices such as entertainment have risen notably for more than a couple of months, with increases in foreign tourism adding upside pressure. In addition, pipeline prices such as producer prices and import prices rose mostly due to higher commodity prices.    BoJ outlook We still think that the BoJ will likely bring about another policy change in October and make a first rate hike attempt in the second quarter of next year. In our view, consumer prices will likely stay above the BoJ's projection and clearer signs of demand-side pressure will emerge over the next couple of months, allowing the BoJ to at least change its YCC policy. In terms of a rate hike, the BoJ will likely wait until there are signs that solid wage growth has been sustained, and thus it will likely come in the second quarter of next year.    

"Now is not the time to talk about future prospects". That was the tone of the European Central Bank's October meeting, the results of which were revealed on Thursday. Overall, the central bank made the expected decision to maintain interest rates as they were. The likelihood of this scenario being realized was 100%, so the market paid little attention to the formal outcomes of the meeting. The EUR/USD pair remained in a standstill, awaiting ECB President Christine Lagarde's press conference. Lagarde slightly stirred the pair with her rhetoric, and the dynamics initially favored the euro. The bulls pushed toward the boundaries of the 1.6-figure but hesitated to attack that target due to weak fundamental arguments. It's worth noting that in the lead-up to the October meeting, most experts were confident that the ECB would keep not only monetary policy unchanged but also the main formulations of the accompanying statement unchanged. According to their forecasts, Lagarde was also expected to reiterate the main theses outlined after the previous meeting - that the ECB was unlikely to raise rates in the foreseeable future but would commit to keeping them at the current level for a long time. In addition, some experts considered the possibility that the Bank would reduce interest rates in the first half of 2024, given the drop in overall and core inflation in the eurozone and the weak 0.1% growth in the European economy in the second quarter.   However, the ECB did not present any hawkish or dovish surprises. Admittedly, Lagarde did tweak the tone of her rhetoric, offering some support for the euro, but these remarks failed to impress the market. In general, the ECB head merely dispelled rumors that the central bank is ready to discuss the timing and conditions of monetary policy easing. According to her, the issue of lowering interest rates was not discussed at the recent meeting as "it would be premature." She also said that the ECB had not discussed the possibility of changing the terms of the PEPP asset purchase program, which had been rumored in October. Lagarde emphasized that the central bank would reinvest all the cash it receives from maturing bonds it holds under the program, at least until the end of 2024. Regarding the fate of interest rates, on one hand, the ECB head reiterated that "rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target." But on the other hand, she listed inflationary risks. Among these are the recent sharp rise in energy prices due to geopolitical tensions in the Middle East, the possible increase in food prices, and active wage growth in eurozone countries. Lagarde emphasized that internal price pressures remain strong, and "the risks to economic growth remain tilted to the downside." Such rhetoric does not indicate that the ECB is ready to return to raising rates in the near future. But at the same time, Lagarde effectively refuted rumors that the central bank is considering easing the terms of its APP in the near term. Her statement that "now is not the time for forward guidance" can be interpreted in different ways, either in the context of potential future policy tightening or easing. However, if we compile the main theses voiced by Lagarde, we can conclude that the ECB has primarily distanced itself from the scenario of lowering interest rates in the near future. Thus, the ECB, while not providing substantial support to the euro, also did not exert significant pressure on the single currency. The ECB's meeting did not meet the doves' expectations (as there were no hawkish expectations). We can assume that the market will shift its focus to American events starting on Friday. The main focus will be on the PCE index. The U.S. economy expanded at a robust 4.9% annual rate in the third quarter, the highest growth rate since the fourth quarter of 2021, compared to a mere 2.1% growth in the U.S. economy in the second quarter. If the primary personal consumption expenditure index reaches the forecast level (not to mention the "red zone"), the dollar could come under significant pressure as risk appetite may increase in the market. Signs of slowing inflation amid strong GDP growth are likely to contribute to a decline in Treasury yields, and consequently, the greenback

GBP: Forward guidance returns. Is the market listening? Yesterday's Bank of England (BoE) 6-3 vote for unchanged rates came as no surprise. What was a surprise was the re-introduction of forward guidance – i.e., that 'monetary policy is likely to need to be restrictive for an extended period of time'. Clearly, the BoE is trying to prevent the premature easing of financial conditions which would be inconsistent with policy still threatening a further hike. Arguably, their intervention here did have some impact on markets where the Sonia Dec 25 futures contract – which was briefly up 16 ticks on the day – only ended up 11 ticks. This is in an environment of softer money market rates globally. Investors know that forward guidance is used as a tool by central bankers (remember the Fed in 2021 saying that rates would stay at zero until 2024?) and it looks like the next nine months will be a game of cat and mouse as investors push for rate cuts and the BoE fights back. We think data will probably support investors and see upside risks to our year-end EUR/GBP forecast of 0.8700. GBP/USD should do a little better today in the risk-positive environment. Favour a test of 1.2250 above which 1.2335 opens up.

GBP: Not quite the BoE pushback we were expecting Having re-introduced forward guidance last week, we thought the Bank of England (BoE) might have pushed back against market pricing for rate cuts in the second half of 2024. Instead, BoE Chief Economist Huw Pill yesterday said that expectations for rate cuts from next summer looked reasonable. We think these comments are a mild sterling negative and given the risk that Fed-speak puts equities on the back foot again, risk-sensitive sterling could hand back some of its recent gains. For example, EUR/GBP could trade back up to 0.8710/20 and GBP/USD could drop back to 1.2290 perhaps 1.2250. Additionally, Pill's warnings of soft UK CPI releases coming through over the coming months could hold sterling back.

GBP: Softening on the crosses EUR/GBP continues to grind higher - driven we believe by the re-pricing of the Bank of England (BoE) tightening cycle into 2024. Yesterday the market moved to price the first full 25bp BoE cut in June next year and had 78bp of easing priced in by the end of the year. Having switched to forward guidance at the last BoE meeting - keeping restrictive rates for an extended period - the market will now be on the lookout for this language changing. For example, Mexico's central bank, Banxico, recently switched language from 'extended period' to 'some time' presumably forewarning the start of easing in February/March next year. Quite a lot of BoE easing is already priced in for next year, however, meaning it is not certain EUR/GBP has to trade up to 0.8800 just yet. Cable is eating into this week's rally and could dip further unless something like today's US jobless claims disappoint.

National Bank of Hungary review: The easing continues The National Bank of Hungary cut its base rate by another 75bp, repeating last month’s decision. The Monetary Council did a balancing act, while making the closest thing to a pre-commitment. We therefore expect the central bank to maintain this pace of easing in the coming meetings.   No surprise in November The National Bank of Hungary (NBH) reduced its base rate by 75bp to 11.50% at its November rate setting meeting. At the same time, the entire interest rate corridor was lowered by 75bp, maintaining the symmetry of the +/- 100bp range. Although this was again a unanimous decision, the menu seen in October was also present at this rate-setting meeting. That is, the Monetary Council decided between a 50, 75 or 100bp cut. The statement and press conference made it clear what the reasoning was for sticking with the proverbial golden mean.   The pros and cons canceled each other out A hawkish shift compared to the October meeting was dropped due to favourable incoming macroeconomic data. Hungarian inflation returned to single-digit territory, with the underlying monthly repricing pattern showing similarities to 2019-2020 (pre-shock pattern). The improvement in the external balance continued on the back of rising export capacity, supported by shrinking domestic demand, which reduced import needs and the energy balance also improved. Last but not least, together with the ongoing disinflation, the Hungarian economy exited the recession and the incoming high-frequency data suggest that the year-on-year print could return to positive territory from the fourth quarter of 2023. However, all these positive changes have been accompanied by significant external risks. Geopolitical tensions and sanctions are still with us, and we can't rule out another shock to energy and commodity markets as a result. The armed conflicts in Ukraine and Gaza keep the economic landscape highly unpredictable. On the macroeconomic side, there are ongoing labour market tensions and recessionary fears in the international environment. Against this background, the Monetary Council decided to maintain its cautious approach and closed the door on the dovish 100bp easing option.   Steady as she goes Even before today's official and explicit forward guidance, we expected the National Bank of Hungary to stick to the recent step size as the baseline pace of further rate cuts. During the background discussion, Deputy Governor Virág made it clear that – based on the latest information – the policy rate could fall below 11% by the end of the year and reach single digits in February 2024. We wouldn't go so far as to say that this is a pre-commitment, but it's certainly the closest thing to it. Such a rate path would imply a continuation of 75bp rate cuts up to (and including) the February rate-setting meeting. In general, the statement and the press conference did not bring any changes either in the tone of monetary policy or in the main functions that influence monetary policy decisions. As a result, today's rate-setting meeting can be described as a well-managed non-event.   Our market views After the NBH meeting, everything seems to be in line with market expectations and rates have not moved much. This is good news for the HUF, which has re-established a relationship with rates over the last three days and has weakened to 380 EUR/HUF before the meeting. Still, the recent rally in rates points to weaker HUF levels, but this will probably not be the case for now. A stable NBH and higher EUR/USD could offset this, plus we could see some progress in negotiations with the EU in the near term. Overall, today's meeting thus seems to be positive for HUF, which will halt the weakening from recent days. In the short term we probably need to see some catalysts for new gains, e.g. the EU story, but overall we remain positive on the HUF. If everything goes in a positive direction, then we believe EUR/HUF will move into the 370-375 range before the year ends. On the other hand, the current weakness probably hasn't changed the market's long positioning much and we should still keep that in mind if bad news comes. Rates have rallied a lot in recent weeks and have closed the biggest gaps between market pricing and our forecast. But something is still missing to perfection and we still see the whole curve lower but rather flatter later. At the short end of the curve, we think the market needs to accommodate the set pace of 75bp rate cuts as the central bank confirmed today, while the long end remains significantly elevated also because of high core rates. Thus, as we mentioned earlier, the long end in our view has more potential to rally further and the curve has steepened too early and too quickly, closing the gap with the region.

No surprise in November The National Bank of Hungary (NBH) reduced its base rate by 75bp to 11.50% at its November rate setting meeting. At the same time, the entire interest rate corridor was lowered by 75bp, maintaining the symmetry of the +/- 100bp range. Although this was again a unanimous decision, the menu seen in October was also present at this rate-setting meeting. That is, the Monetary Council decided between a 50, 75 or 100bp cut. The statement and press conference made it clear what the reasoning was for sticking with the proverbial golden mean.   The pros and cons canceled each other out A hawkish shift compared to the October meeting was dropped due to favourable incoming macroeconomic data. Hungarian inflation returned to single-digit territory, with the underlying monthly repricing pattern showing similarities to 2019-2020 (pre-shock pattern). The improvement in the external balance continued on the back of rising export capacity, supported by shrinking domestic demand, which reduced import needs and the energy balance also improved. Last but not least, together with the ongoing disinflation, the Hungarian economy exited the recession and the incoming high-frequency data suggest that the year-on-year print could return to positive territory from the fourth quarter of 2023. However, all these positive changes have been accompanied by significant external risks. Geopolitical tensions and sanctions are still with us, and we can't rule out another shock to energy and commodity markets as a result. The armed conflicts in Ukraine and Gaza keep the economic landscape highly unpredictable. On the macroeconomic side, there are ongoing labour market tensions and recessionary fears in the international environment. Against this background, the Monetary Council decided to maintain its cautious approach and closed the door on the dovish 100bp easing option.   Steady as she goes Even before today's official and explicit forward guidance, we expected the National Bank of Hungary to stick to the recent step size as the baseline pace of further rate cuts. During the background discussion, Deputy Governor Virág made it clear that – based on the latest information – the policy rate could fall below 11% by the end of the year and reach single digits in February 2024. We wouldn't go so far as to say that this is a pre-commitment, but it's certainly the closest thing to it. Such a rate path would imply a continuation of 75bp rate cuts up to (and including) the February rate-setting meeting. In general, the statement and the press conference did not bring any changes either in the tone of monetary policy or in the main functions that influence monetary policy decisions. As a result, today's rate-setting meeting can be described as a well-managed non-event.   Our market views After the NBH meeting, everything seems to be in line with market expectations and rates have not moved much. This is good news for the HUF, which has re-established a relationship with rates over the last three days and has weakened to 380 EUR/HUF before the meeting. Still, the recent rally in rates points to weaker HUF levels, but this will probably not be the case for now. A stable NBH and higher EUR/USD could offset this, plus we could see some progress in negotiations with the EU in the near term. Overall, today's meeting thus seems to be positive for HUF, which will halt the weakening from recent days. In the short term we probably need to see some catalysts for new gains, e.g. the EU story, but overall we remain positive on the HUF. If everything goes in a positive direction, then we believe EUR/HUF will move into the 370-375 range before the year ends. On the other hand, the current weakness probably hasn't changed the market's long positioning much and we should still keep that in mind if bad news comes. Rates have rallied a lot in recent weeks and have closed the biggest gaps between market pricing and our forecast. But something is still missing to perfection and we still see the whole curve lower but rather flatter later. At the short end of the curve, we think the market needs to accommodate the set pace of 75bp rate cuts as the central bank confirmed today, while the long end remains significantly elevated also because of high core rates. Thus, as we mentioned earlier, the long end in our view has more potential to rally further and the curve has steepened too early and too quickly, closing the gap with the region.

GBP: Fiscal divergence Sterling has been performing a little better of late, no doubt buoyed by the better global risk environment. We do also think that the fiscal story has helped, where the UK government plans to put £20bn to work in the economy, while countries like Germany remain hamstrung by its constitutional court. At the same time, the slightly better November PMI readings have supported sterling too.  These developments have left investors looking for just 40-50bp of Bank of England (BoE) easing next year – clearly less than what is expected of the Fed or of the ECB. The UK data calendar is light this week, but we do have several BoE speakers. Governor Andrew Bailey already seems to be playing around with language on forward guidance, where restrictive monetary policy will be retained for an 'extended period'  or, most recently, 'for quite some time'. All in all, we feel that EUR/GBP could correct a little further and a close under 0.8660 could unlock 0.8630 or even 0.8600 this week.

Bank of England to push back against rising tide of rate cut expectations Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time. But with services inflation coming down and wage growth set to follow suit, we think investors are right to be thinking about a summer rate cut. We expect 100bp of cuts next year.   Markets are ramping up rate cut bets, and Governor Bailey isn't happy about it Financial markets are rapidly throwing in the towel on the “higher for longer” narrative that central banks have been pushing hard upon for months. Even more remarkably, a small but growing number of policymakers from the Federal Reserve to the European Central Bank seem to be getting second thoughts too. So far, that market repricing has been less aggressive for the Bank of England. Investors are expecting three rate cuts next year compared to more than five over at the ECB. The first move is seen in June, as opposed to March over in Frankfurt. Despite that more modest adjustment, the Bank of England is starting to sound the alarm. Governor Andrew Bailey said in recent days that he is pushing back “against assumptions that we're talking about cutting interest rates". Those comments followed a firming up of the Bank’s forward guidance back in early November, where it said it expected rates to stay restrictive for “an extended period”. Its November forecasts, premised on rate cut expectations at the time, indicated that inflation may still be a touch above 2% in two years’ time. That was a hint, if only a mild one, that markets were prematurely pricing easing - and rate cut bets have only been ramped up since.   Rate cut expectations are building, though less rapidly than in the US/eurozone   Expect rate cut pushback on Thursday, but investors are right to be thinking about easing That gives us a flavour of what we should expect next week. While the chances of a surprise rate hike have long since faded away, there’s a good chance that the three hawks on the committee once again vote for another 25bp rate increase, leaving us with a repeat 6-3 vote in favour of no change. We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited. But we expect the same hawkish forward guidance as last time, including the line on keeping rates restrictive for a prolonged period of time. Could the Bank be tempted to go further still and formally say that markets have got it wrong? The BoE has shown itself less willing than some other central banks to either comment directly on market pricing in its post-meeting statements, or make predictions about how it'll vote at future meetings. The last time it did this was in November 2022, where disfunction in UK markets meant rate hike pricing had reached an extreme level. We doubt they’ll do something similar this month. Policymakers may be uneasy about the recent repricing of UK rate expectations, but central banks globally have learned the hard way over the last couple of years that trying to predict and commit to future policy, with relative certainty, is a fool's game. The Bank will also be gratified that the data is at least starting to go in the right direction. Services inflation came in below the Bank’s most recent forecast, and while one month doesn’t make a trend, we think there are good reasons to expect further declines over 2024. Admittedly, we think services CPI will stay sticky in the 6% area through the early stages of next year, but by the summer, we expect to have slipped to 4% or below. Likewise, the jobs market is clearly cooling and that suggests the days of private-sector wage growth at 8% are behind us. We expect this to get back to the 4-4.5% area by next summer too. Markets may be right to assume that the BoE will be a little later to fire the starting gun on rate cuts than its European neighbours. But when the rate cuts start, we think the BoE’s easing cycle will ultimately prove more aggressive. We expect 100bp of rate cuts from August next year, and another 100bp in 2025.   Sterling benefits from the BoE position Sterling has enjoyed November. The Bank of England's trade-weighted exchange rate is about 2% higher. The rally probably has less to do with the UK government's stimulus and more to do with the fact that investors have been falling over themselves to price lower interest both in the US and particularly in the eurozone.  In terms of the risk to sterling market interest rates and the currency from the December BoE meeting, we tend to think it is too early for the Bank of England to condone easing expectations - even though those expectations are substantially more modest than those on the eurozone. This could mean that EUR/GBP continues to trade on the weak side into year-end - probably in the 0.8500-0.8600 range. Into 2024, however, we expect market pricing to correct - less to be priced for the ECB, more for the UK and EUR/GBP should head back up to the 0.88 area. But that's a story for next year.    Sterling trade-weighted index edges higher

UK: Bank of England to offer push back against rising tide of rate cut expectations Financial markets are rapidly throwing in the towel on the “higher for longer” narrative that central banks have been pushing hard upon for months. Admittedly so far, that market repricing has been less aggressive for the Bank of England. But with three rate cuts now priced for 2024, the Bank of England is starting to sound the alarm. Governor Andrew Bailey said in recent days that he is pushing back “against assumptions that we're talking about cutting interest rates". Those comments followed a firming up of the Bank’s forward guidance back in November, where it said it expected rates to stay restrictive for “an extended period”. Expect that narrative to be reiterated on Thursday. A 6-3 vote in favour of no change in rates is our base case, and that matches the vote split from November. Could the Bank go further still and formally say that markets are overpricing 2024 easing in the statement? It hasn’t commented in this way since November 2022, in what was then a stressed market environment. We doubt they’ll do something similar this month. Policymakers may be uneasy about the recent repricing of UK rate expectations, but central banks globally have learned the hard way over the last couple of years that trying to predict and commit to future policy, with relative certainty, is a fool's game. The Bank will also be gratified that the data is at least starting to go in the right direction. Services inflation came in below the Bank’s most recent forecast. Markets may be right to assume that the BoE will be a little later to fire the starting gun on rate cuts than its European neighbours. But when the rate cuts start, we think the BoE’s easing cycle will ultimately prove more aggressive. We expect 100bp of rate cuts from August next year, and another 100bp in 2025.

Bank of England pushes back on calls for early 2024 rate cuts Unlike the Federal Reserve, the Bank of England is clearly reluctant to endorse market pricing for rate cuts in 2024. The Bank has reiterated that rates need to stay restrictive for quite some time, but markets are probably right to expect cuts by next summer.   Bank of England keeps rates on hold The Bank of England has kept rates on hold at its final meeting of 2023. But unlike the Federal Reserve last night, the UK’s central bank is clearly much more reluctant to do or say anything that might be seen as an endorsement of market rate cut expectations. Going into the meeting, markets were pricing upwards of four rate cuts in 2024, starting from May. We only get a statement and set of minutes today, so no press conference or new forecasts. That means there were only ever going to be limited avenues for the BoE to push back on market expectations. Even so, there’s nothing particularly dovish about today’s decision. We still have three out of the nine committee members voting for an immediate rate hike, and that’s a mirror image of the November decision. There was a risk that one or two of those hawks decided to throw in the towel and join the crowd voting for no change. The immediate market reaction – stronger pound and higher two-year bond yields – suggests markets were positioned more in this direction going into the meeting. The Bank also opted against changing any of its forward guidance – that is, statements about the future direction of policy. Importantly, it repeated that rates need to “be restrictive for an extended period of time”. That’s not surprising, but it is another signal that the Bank isn’t totally comfortable with market rate cut pricing. Governor Bailey made this fairly clear in comments he made earlier this month.   Rate cuts are coming in 2024 However, markets are right to be thinking about a series of rate cuts next year. The Bank itself acknowledged in the latest statement that both private-sector wage growth and services inflation – both of which are labelled as key metrics for the BoE – have come down more than it expected. While services inflation is likely to be sticky in the 6% area into early next year, we expect both this and wage growth to reach the 4% region next summer. We think that will be a catalyst for rate cuts to begin. Our current forecast is for an August rate cut, but if markets prove right in that the Fed and ECB will have started cutting in either March or April, we wouldn’t rule out the BoE moving earlier too. Market pricing for four rate cuts next year seems about right.

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.

Bank of Japan opens the door to ending negative rates, but timing uncertainty remains The Bank of Japan stood pat on monetary policy today as widely expected. But the market is now paying attention to a more positive tone on the wage and inflation outlook, as well as an upgrade to the FY2024 inflation outlook which lays the groundwork for policy normalisation. We still see a slightly higher chance of a first hike taking place in June than in April.   No surprise that the BoJ kept its policy rate and 10-year yield target unchanged We think the Bank of Japan's modest change in its view on inflation hints that policy normalisation is approaching. The BoJ assessed its statement that the likelihood of achieving the price goal has “continued to gradually rise.” Governor Kazuo Ueda’s comments on wages and inflation were also more positive than in previous meetings, signalling that a path to policy normalisation could be underway. Markets were likely pleased to hear that the central bank would consider whether negative rates should remain if the price goal is in sight and that it can make policy decisions without all small firm wage data.   Quarterly outlook report Aside from the policy decision itself, the BoJ’s quarterly outlook report was closely watched by market participants. As we expected, the BoJ lowered its core inflation outlook for FY 2024 from 2.8% to 2.4% while upgrading the outlook for FY 2025 from 1.7% to 1.8%. The government's efforts to curb inflation and the recent weaker-than-expected global commodity prices will likely drag down the price for early 2024, but the BoJ still sees underlying inflation pressures remaining through FY 2025, induced by solid wage growth. This tells us that a rate hike is only a matter of time – but with the BoJ reconfirming its patient easing stance, the timing remains uncertain.     BoJ outlook Market bets on an April rate hike increased sharply after today’s decision, but for now, we retain our long-standing view of the first rate hike materialising in June. Of course, this could change depending on upcoming inflation trends and growth conditions. There was no change in the forward guidance from today’s statement, and we don’t think the BoJ will deliver any policy changes at its next meeting in March. We also don't expect it to make any noise by delivering a surprise policy change at the end of the fiscal year. Governor Ueda has stated that more information will be available ahead of the April meeting than in March, so we're inclined to think that the latter is probably off the table. There are several areas to follow to gauge the precise timing of the BoJ’s policy change, but inflation should be considered the most important of them all. In our view, the inflation path up until April will be quite bumpy, exacerbated by the government’s energy subsidy programmes. Consumer inflation has slowed over the past two months as the government renewed some of the subsidy programmes from last November, combined with softening oil prices. We expect inflation to move even lower in January (vs 2.2% in December) but pick up quite sharply again in February. April CPI is a key piece of data for judging the inflation trend, but by the time the April meeting is held, the nationwide CPI report won't yet be available. April is also in the middle of the wage-negotiating Shunto season. While Governor Ueda mentioned that there isn't any need to wait to gather all data from small firms, we belive that the BoJ will wait a couple of more months to see if the wage growth could actually lead to sustain inflationary pressure – particularly in service prices. The BoJ will take orderly steps, including forward guidance being revised before any action is taken. We think that this revision will likely happen in April. Taking these factors into consideration, we still expect the Bank of Japan to announce its first rate hike in June for now.     Choppy inflation is expected at least for 1Q24   FX: Not hawkish enough USD/JPY held pretty steady after the release of the BoJ decision but dropped around 0.7% as Governor Ueda hinted that wages and prices were heading in the direction of price stability. The same thing occurred in the JGB market, with 10-year JGB yields edging about 3-4bps higher around the same time as USD/JPY sold off. As above, market expectations of a shift in BoJ policy will now roll on to the 26 April meeting, when the next set of CPI forecasts will be released. Today’s price action, where the yen is now handing back its short-term gains, suggests the market will be happy to park the BoJ policy normalisation story until April. Given further upside risks to US rates over the next month – including the risk of higher Treasury yields next week, should the US quarterly refunding announcement shine a light on the US fiscal deficit – USD/JPY can probably continue to trade around this 147/148 area. And BoJ intervention remains a threat should USD/JPY trade over 150 again. We currently have USD/JPY forecasts at 140 for the end of March and 135 for the end of June. We certainly like that direction of travel – particularly if the short-end of the US curve starts to break lower ahead of the first Fed hike, which we forecast in May. The risk is that mixed market sentiment and low volatility keep interest in the carry trade and keep the yen softer than our end-of-first quarter target. However, we suspect carry trade investors will be increasingly turning to the Swiss franc as their preferred funding currency. The Swiss National Bank wants a weaker currency and may be the first to ease. The BoJ wants a stronger currency and will now be the only G10 central bank to hike.   

ECB keeps rates and communication unchanged, discussion of rate cuts premature European Central Bank President Christine Lagarde stressed during the press conference that any discussion on rate cuts was still premature.   At today’s meeting, the European Central Bank kept everything unchanged: both policy rates and communication. The press release with the policy announcements is almost a verbatim copy of the December statement. The ECB only dropped two phrases that could be interpreted as opening the door to rate cuts very softly: the December comments on domestic price pressure being elevated, and the temporary pick-up in inflation. The fact that these two phrases were dropped, however, could also simply be linked to the fact that there are no new forecasts. And during the press conference, ECB President Lagarde mentioned that observers shouldn’t pay too much attention to subtle changes in the text. Admittedly, we don’t know what to do with this comment, bearing in mind that central bankers are normally known for weighing every single word and comma in their communication. Also during the press conference, Lagarde stressed that the Governing Council had concluded that any discussion on rate cuts was currently premature. She repeated the importance of wage developments in the coming months for the next ECB steps, pointing to some indicators that already show some slowing in wage growth. While this could be seen as a very tentative shift towards more dovishness, Lagarde also emphasised the need for inflation to be on a sustainable downward trend. Asked whether she would repeat her statement from last week in Davos that rate cuts by the summer were likely, Lagarde replied that she always stood by what she had said. Even though we today learned that we shouldn’t pay too much attention to every single word, we do remember that Lagarde said in November last year that the ECB wouldn’t cut rates in the next couple of quarters. Combining these two comments would imply that a first rate cut could not come in June but only in July at the earliest. However, past experience has shown that the ECB president is not necessarily the best ECB forecaster.   We stick to our call of a June cut Looking ahead, today’s meeting once again stressed that the ECB is in no position to start cutting rates soon. In any case, even if actual growth continues to turn out weaker than the ECB had expected every single quarter, as long as the eurozone remains in de facto stagnation mode and doesn’t slide into a more severe recession, and as long as the ECB continues to predict a return to potential growth rates one or two quarters later, there is no reason for the ECB to react to more sluggish growth with imminent rate cuts. Also, the job of bringing inflation back to target is not done yet. In the coming months, inflation developments will be determined by two opposing trends: more disinflation and potentially even deflation as a result of weaker demand, but also new inflationary pressures due to less favourable base effects, new inflationary pressure as a result of the tensions in the Suez Canal as well as government interventions in some countries, above all Germany. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue to believe that a first rate cut will not come before June.

ECB leaves rates on hold Lagarde still eyeing summer rate cut EURUSD consolidating after correction The European Central Bank left interest rates on hold on Thursday and claimed inflation is progressing towards its target while giving no clear guidance on when interest rates will start falling. We came into the new year with markets pricing in a March rate cut and that is now looking increasingly difficult. Even with a late pivot – which was always likely the strategy of the central bank – policymakers would have to signal that a rate cut is a live possibility over the next six weeks in appearances made between meetings. That’s not impossible but it’s arguably not particularly transparent. The data is unlikely to surprise to that degree. President Christine Lagarde and some colleagues have previously indicated a rate cut in summer may be appropriate but investors are not convinced we’ll have to wait that long. Lagarde stuck with that today while suggesting demand was weaker, as is the economy, and inflation is falling. Perhaps this is her way of leaving the door slightly ajar for March or maybe the usual lack of clear guidance has left everyone desperately looking for something that isn’t there. I get the feeling Lagarde and her colleagues wanted to give absolutely nothing away today, instead opting for an array of vague, uninformative statements that buy them six more weeks before they may have to say or do something. A bullish correction or sideways continuation?   The euro has drifted lower after the announcement and press conference but it hasn’t broken out of the range it’s traded in over the last week or so. EURUSD Daily Source – OANDA The correction we’ve seen since the turn of the year appears to be running on fumes but there’s still a question of whether this is just that, and will turn higher and look to break the highs, or just a continuation of the longer term sideways trend. There are some important support levels between 1.07 and 1.0850 which could tell us which is the case.  

Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.