As expected, the European Central Bank (ECB) maintained its key policy rates at record highs in yesterday's rate decision. However, it delivered its most unequivocal indication yet of its readiness to initiate rate cuts in the near future. Consequently, the euro depreciated to $1.07, marking its lowest point in approximately two months. Meanwhile, the yield on the 10-year German Bund remained steady at 2.45%, maintaining its proximity to its highest level in over four months, bolstered by developments in the US Treasury market.
The USD continued its upward trajectory against various currencies over the last 24 hours, fuelled by worries over ongoing inflationary pressures in the US, exacerbated by a rise in producer prices. This surge propelled the dollar index to reach a new six-month peak, mirroring the ascent of US Treasury yields. Speculation about Federal Reserve rate cuts has dwindled, while global risk sentiment has been shaken, reflected in US stock indices facing their first two-week downturn since October 2023.
Despite the UK economy slipping into a technical recession at the close of last year, investors have found encouragement in recent positive business surveys, suggesting the downturn may be brief. Indeed, UK GDP for February posted a 0.1% month-on-month increase, aligning with market expectations but at a slower pace compared to the previous month. The primary boost came from production, which surged by 1.1%, rebounding from a 0.3% decline in January. Conversely, construction contracted by 1.9%, following a 1.1% expansion. Looking at the three-month period ending in February, British GDP expanded by 0.2%.
GBP has maintained a relatively positive stance compared to its counterparts, showing a 1.4% increase against the EUR since the beginning of the year. This can be attributed in part to the anticipation that the ECB will implement more rate cuts than the Bank of England. However, the currency pair has exhibited minimal volatility and momentum in either direction, remaining confined within a narrow 1.2% range over the past three months . Policy and growth differentials continue to be crucial factors, and we are closely monitoring the data for any insights.
