GBP slips on expected softer BOE

There is almost zero likelihood of a change in the 5.25% UK base rate when the Bank of England meets today. However, recent UK data would suggest the BOE must be getting near to the point where they start hinting at interest rate cuts. The markets appear to be factoring in a 25 basis point interest rate cut as soon as May. If there is anything in the UK central bank’s statement today that alludes to a softening of their stance, sterling is likely to weaken. It has already done so across the board ahead of today’s meeting. The GBP/USD rate is the exception, but more of that below. GBP/EUR is just about hanging on to €1.16 and the pound is lower against the Australian and New Zealand dollars despite poor data from NZD overnight. It is going to be a busy day with not only the UK central bank but the European Central Bank in action.

Fed on hold but softer tone weakens USD

The US Federal Reserve did as expected and held their base rate at 5.5% when they met late yesterday. In a forecast that the Fed released, it is clear that most of the members of the board consider we will see interest rate cuts in 2024. Surely the markets must have realised that the announcement was coming soon but it didn’t stop them from selling the US dollar once it had been read. The GBP/USD rate gained over a cent on the news and started at $1.2615 this morning. We also saw the EUR/USD rate rise a cent to this morning’s $1.0880. The USD weakness flattered the Aussie and Kiwi dollars too. Both are stronger this morning – more of that below. Although we will see US retail sales today, central bank meetings in the UK and EU will be more influential.

NZ GDP in shock contraction

The weakness in the US dollar added strength to the value of the Kiwi dollar overnight. That is largely due to the influence the US dollar has on commodity exports from New Zealand. The GBP/NZD rate is down to NZD 2.0310 for the first time since October. From a chartist standpoint, if the pound doesn’t gain enough support at this level we could see the psychological barrier of NZD 2.00 tested. Undoubtedly, the Kiwi dollar would be weaker this morning, were it not for the US dollar’s problems, after really soft GDP data released late yesterday evening. New Zealand’s gross domestic product contracted by 0.6% in the year to October. That is in stark contrast to the 0.5% growth the markets had been expecting. If the Reserve Bank of New Zealand needed a wake-up call about the damage high-interest rates are doing to the economy, then maybe this is the one.

Euro mixed ahead of ECB statement

As with most central banks, the European Central Bank is still acting like a rabbit in headlights as they mull whether they have done enough with the high cost of borrowing to control inflation. So it is highly unlikely they will move their base rate today but, also in line with other central banks, it is likely they will be softening their stance on tight monetary policy and the euro, which has benefited from the weaker US dollar, is likely to give up some of its gains. Right now, the GBP/EUR rate is just about holding onto €1.16 and, as mentioned above, weakness in the US dollar has flattered the euro to some degree. The EUR/USD rate is up to $1.0880.