Thursday brings a flood of central bank decisions, following the Fed’s meeting yesterday, where interest rates remained unchanged. Meanwhile, ECB President Christine Lagarde shares her concerns in Brussels.
A Rather Strange Dove
The echoes of yesterday’s FOMC meeting continue to resonate. Markets have been trying to position themselves for a more dovish Fed stance, though this seems somewhat precarious. Three main arguments are being put forward in favor of this view.
First, the Fed expects a more significant economic slowdown than previously anticipated. The U.S. economy is projected to grow at 1.7%, compared to the 2.1% forecasted in previous projections. Second, Fed Chair Jerome Powell emphasized that part of this year’s inflation will result from trade policies and is expected to be “temporary”—a favorite term of the Fed. The most dovish move, however, is the reduction of the quantitative tightening (QT) program. Until now, the Fed has been absorbing $25 billion from the market each month in exchange for bonds. Now, this pace will slow down fivefold. The remaining $5 billion is more of a cosmetic adjustment.
That’s where the dovish news ends. It is important to note that the parallel program based on mortgage-backed securities (MBS) remains unchanged, continuing to drain $35 billion from the market each month. Additionally, not only has the current interest rate been left unchanged, but the dot plot projections for rate cuts remain the same. The consensus among FOMC members still forecasts two rate cuts this year.
Amidst all of this, Powell persistently emphasized the importance of inflation, which remains elevated. Yesterday’s inflation projection is even higher than December’s. Ultimately, the Fed appears to be signaling a “wait and see” stance, a historically common shield used by policymakers. This time, however, it seems to make sense.
A Marathon of Decisions
Thursday’s session brings a marathon of central bank decisions, beginning overnight in China. Contrary to weekend speculation, Chinese policymakers decided to keep key monetary policy parameters unchanged. PBOC Governor Pan Gongsheng pointed to improving macroeconomic indicators, including GDP growth, retail sales, and industrial production.
Interest rates were also kept unchanged in Sweden and the UK. The Bank of England’s decision slightly surprised markets, with only one vote in favor of a rate hike. Meanwhile, as expected, the Swiss National Bank (SNB) cut its interest rate, bringing the key rate down to just 0.25%. This marks the fifth rate cut in the current cycle. The SNB, in its typical style, stated that it “will continue to monitor the situation closely and adjust monetary policy as needed.” This suggests that another rate cut from the Swiss central bank cannot be ruled out in the near future.
Concerns About Growth
The European Central Bank (ECB) did not decide on interest rates today, but its president, Christine Lagarde, shared her concerns during a speech in Brussels. Her primary worry is a potential trade war. According to ECB estimates, the introduction of tariffs by the U.S. would slow economic growth by 0.3 percentage points—equivalent to one-third of this year’s expected growth. If the EU responds symmetrically, growth could lose another 0.2 percentage points. Lagarde also rightly pointed out that the current uncertainty will impact future investments, potentially leading to broader multiplier effects in the economy.
The currency market continues the trend set yesterday, with the U.S. dollar strengthening further. The EUR/USD pair is now trading around 1.084, pushing the Polish złoty lower across the board. The euro is now close to PLN 4.20, reaching the upper limit of its current consolidation range. The U.S. dollar has also strengthened, trading at PLN 3.87. Despite the SNB’s rate cut, the Swiss franc has appreciated against the złoty, rising to PLN 4.39.
Author: Krzysztof Adamczak, Currency Analyst at Walutomat.pl
Source: Manager Plus
