GBP extends rebound against EUR & USD

AUD: RBA delivers hawkish rate cut helping to support Aussie

The US dollar has rebounded modestly at the start of this week helping to lift the dollar index back above the 107.00-level overnight. The worst performing G10 currency has been the New Zealand dollar which has fallen by around 0.5% against both the Australian and US dollars. The main macro event overnight was the RBA’s latest policy meeting at which they finally decided to begin lowering rates after keeping rates on hold since November 2023. The RBA delivered a 25bps rate cut as widely expected overnight lowering the policy rate to 4.10%. The updated policy statement revealed that the RBA believes that “some of the upside risk to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected”. The decision today to “remove a little of the policy restrictiveness” was an acknowledgement that “progress has been made” but they are “cautious” about the outlook. The RBA has stressed that they will cautious in delivering further rate cuts which has helped to support the Australian dollar overnight especially against the New Zealand dollar. It has lifted AUD/NZD to an intra-day high overnight at 1.1141. The pair has been in narrow range between 1.1000 and 1.1100 for most of this year. The RBA’s caution in delivering further rate cuts continues to stands in contrast to the RBNZ who have already cut rates more aggressively by 125bps since their own easing cycle started in August and are expected to deliver a third consecutive larger 50bps at tomorrow’s policy meeting, although it is possible that they could signal a slower pace of easing as their policy rate moves closer to estimates of the neutral rate.    

The RBA’s caution over delivering further rate cuts reflects ongoing concerns that upside inflation risks remain. The RBA expressed concern that “some labour market data have been unexpectedly strong” which suggests that the labour market maybe somewhat tighter than they had previously thought. The RBA highlighted as well that their central forecast for underlying inflation has been “revised up a little” over 2026. Those updated forecasts suggested to the RBA that “if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the mid-point of the target range. In the accompanying press conference Governor Bullock reinforced the relatively hawkish message by stating that “I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the markets are coming”. The RBA needs to see more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates, and is “very alert” to upside risks that could derail disinflationary progress. The comments have made the Australian rate market less confident that the RBA will deliver two further 25bps rate cuts by the end of this year. The RBA’s next rate cut is expected to be delivered by the July policy meeting. Overall, the RBA’s cautious message over the need for further easing is supportive for the Australian dollar which is already one of the top three performing G10 currencies so far this year. The Aussie has outperformed recently  alongside the strong rebound in commodity prices.

GBP CONTINUES TO REBOUND FOLLOWING JANUARY SELL-OFF

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Recent UK data dampens expectations for more active BoE easing

The pound has continued to strengthen at the start of this week resulting in EUR/GBP falling back below the 0.8300-level as it moves back to levels that were recorded earlier this year prior to the gilt market sell-off in January. The pound has also risen to its highest level against the US dollar so far this year at 1.2635. The pound ahs been supported recently by the improving economic data flow from the UK. It was revealed at the end of last week that the UK economy unexpectedly avoided contracting in Q4. The UK economy expanded marginally by 0.1% in Q4 driven mainly by a pick-up in service sector growth in December when activity expanded by 0.4%M/M. It was an upside surprise for the BoE whose latest staff forecast from the February MPC meeting had been expecting the UK economy to contract by -0.1% in Q4 and to expand marginally by 0.1% in Q1 of this year.

However, Governor Bailey poured cold water over the better GDP data at the end of last year by emphasizing in an interview yesterday that the UK economy is still “static”. He doesn’t think the GDP numbers “changes the general story we have got, which is an economy that has been quite static since late spring last year”. He said “when we look at the underlying state of the economy, which is an important context for judging the persistent point, we have had a period of low growth and we think the labour market is softening”. The release this morning of the latest labour market data from the UK also came in on the stronger side of expectations. It revealed that the number of payrolled employees increased by 21k in January following two months of declines at the end of last year. Payrolled employees had been expected to fall by -30k in January. Similar to the GDP data, one stronger print does not change the general story of softer labour market data but it will help to further dampen expectations for more active BoE easing in the near-term alongside still uncomfortably strong wage growth. Regular pay growth in the private sector continued to increase by an annualized rate  6.1% in 2H of last year. We still expect the BoE to stick to quarterly rate cuts with the next in May.            

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	09:30	BoE Gov Bailey Speaks	--	--	--	!!!
UK	09:30	Labour Productivity	Q3	-0.8%	0.2%	!!
EC	10:00	Eurogroup Meetings	--	--	--	!!
EC	10:00	ZEW Economic Sentiment	Feb	24.3	18.0	!!
CA	13:30	CPI (YoY)	Jan	1.8%	1.8%	!
US	15:00	NAHB Housing Market Index	Feb	46	47	!
US	15:20	FOMC Member Daly Speaks	--	--	--	!!
US	21:00	Overall Net Capital Flow	Dec	--	159.90B	!

Source: Bloomberg