RBA Minutes
The Reserve Bank of Australia (RBA) is set to release its minutes on Tuesday at 12:30 am GMT, garnering attention from Asia Pacific traders. However, there is unlikely to be significant new information beyond what is already known. In its initial policy-setting meeting for the year, the RBA maintained the Cash Rate at 4.35%, marking a 12-year high. The accompanying Rate Statement acknowledged the possibility of further policy tightening. Conversely, the Statement of Monetary Policy (SoMP) revealed a downward adjustment in the central bank's growth and inflation projections, coupled with increased unemployment. The RBA now expects CPI inflation to decrease to 2.8% by the end of 2025 (compared to November's forecast of 2.9%), and CPI inflation to slow to 3.2% by the end of 2024 (previously projected at 3.5% in November). The peak unemployment rate is anticipated to be 4.4% in mid-2025, holding steady until the year-end, with GDP growth forecasted at 2.1% in mid-2025, down from the November reading of 2.2%.
FOMC Minutes
This week, on Wednesday at 7:00 pm GMT, market participants will closely monitor the minutes from the recent FOMC rate decision. The previous week's US CPI data, which showed inflation slowing but not as rapidly as anticipated, strengthened the dollar and led to a reevaluation of Fed rate-cut expectations. This realignment brought market forecasts more in line with the Fed's stance, as reflected in the latest Summary of Economic Projections (SEP), where the Fed indicated only three rate cuts for the year. Despite heightened inflationary pressures, the economy continues to exhibit robust GDP growth and a tight labor market.
The recent dovish repricing, influenced by the Fed's updated projections, is not expected to cause significant concern. Futures market data indicates that the first 25bp rate cut is now anticipated in June (with March considered unlikely for a change, having only a 10% probability of a 25bp cut). The market foresees a total of 93bps in easing throughout the year, equivalent to just under four rate cuts.
The January Fed policy meeting witnessed a language shift in the Rate Statement, as a familiar sentence expressing readiness to increase rates was struck through: '… additional policy firming that may be appropriate to return inflation to 2 percent over time.' While the removal of this sentence implies a dovish stance, the replacement introduced a more hawkish tone, emphasizing the central bank's reluctance to cut rates until inflation further moderates.
Looking ahead to the minutes, there might be resistance to a rate cut in March, aligning with current expectations. Such a stance could temporarily boost demand for the dollar. However, if the minutes fail to provide new insights, which is the most probable scenario, trading based on the report may prove challenging.
PURCHASE MANAGER INDEX (all Currencies) – February 2023
On Thursday, the eurozone (9:00 am GMT), the UK (9:30 am), and the US (2:45 pm) are set to release PMIs, drawing considerable attention from the market.
In the UK, last week featured key economic indicators, including higher-than-expected wages. However, CPI inflation and GDP data revealed larger-than-anticipated misses, impacting the performance of the pound, which is down -0.7% against the US dollar month-to-date. The latest GDP figures pushed the UK into a mild technical recession, reflecting a prolonged period of economic stagnation. The week concluded with a rebound in retail sales for January.
This week, a keen focus will be on the UK business surveys. The services PMI entered expansionary territory in late 2023, following a pickup, while manufacturing remains in contraction but at a slower pace than mid-2023. Market consensus suggests a slight uptick in the services PMI to 54.4 in February from January's 54.3, with the manufacturing PMI forecasted to rise to 47.5 from 47.0. PMI data can significantly impact the market, particularly if there are prints that deviate from consensus.
Given the recent misses in CPI and GDP and the failure of sterling to rally beyond $1.26 despite the upbeat retail sales, a PMI miss could potentially drive the pound below the stubborn range lows of $1.2540. Conversely, a stronger-than-expected release may lead to hawkish repricing, pushing rate expectations further into the year for the first 25bp cut and providing support to sterling from range lows.
OIS pricing currently indicates expectations of a 25bps rate cut by the Bank of England (BoE) in August, with a total easing of 72bps (equivalent to three rate cuts) by the end of the year. This suggests the market anticipates the BoE to be among the later major central banks to initiate easing (in contrast to the Fed expected to act in June and the ECB in Q2). This marks a significant shift from the beginning of the year when around five rate cuts were priced in.
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