UK policymakers are maintaining a cautious dovish stance, reinforcing market anticipation of an easing cycle starting in August. Approximately 0.75% in cuts are projected for this year. The committee is particularly cautious about early cuts, emphasizing that while headline inflation is expected to ease towards the target, wage inflation remains excessively high. Officials downplayed the significance of the technical recession, highlighting that the inflation outlook holds more importance for monetary policy than growth. The committee is mindful that the full impact of rate increases has not yet fully permeated the underlying economy.

Simultaneously, the budget on March 6th will shift the spotlight to fiscal policy and its implications for the growth outlook.

In the US, inflation remains the primary driver of monetary policy, and a further moderation is anticipated in the upcoming months, with rate cuts expected to commence in June. The robust performance of the US economy will dictate the extent of rate cuts, with market forecasts adjusted to 0.85% for this year.

In Europe, despite recent data suggesting a peak in wage pressures, policymakers are adamant about not implementing rate cuts before summer. Nevertheless, the market anticipates a pre-emptive cut, possibly as early as April, given the prevailing bleak economic outlook.

On the currency exchanges, the dollar has weakened due to lowered expectations of US rate cuts but remains largely within recent ranges due to a lack of strong market conviction. Next week's data is anticipated to have a limited impact, with interest rate differentials continuing to steer the narrative.

Yesterday's UK PMIs surpassed expectations, indicating that the technical recession in the UK may be over. The private sector saw its output expand for the fourth consecutive month, marking the fastest growth since May 2023. This positive trend is primarily attributed to a robust service sector, outperforming the Eurozone. Despite this, the GBP/EUR remains below €1.17, while the GBP/USD remains above $1.26, experiencing a significant reversal from a three-week high above $1.27. The currency pair appears poised for its most successful week in 2024.

While the headline PMI figures in the UK were stronger than anticipated, the focus for the Bank of England (BoE) remains on inflation. The accompanying PMI data warns that price pressures in the service sector remain elevated, potentially delaying any BoE rate cuts. Although services inflation and wage growth are expected to decrease by summer, short-term stability is anticipated, supporting the pound through favourable yield spreads. Currently, money markets predict just over 60 basis points of BoE rate cuts this year, a decrease from 75 basis points the previous week. UK 2-year yields have risen over 60 basis points since the beginning of the year, and the pound has appreciated against 60% of its 57 global peers month-to-date, up from 40% at the start of February.

Despite a dip in consumer sentiment in February, with households expressing a more pessimistic view of their financial situations and the economic outlook, the pound remains steady. GBP/USD seems to have found reliable support at its 50-week moving average, hinting at another upward movement within its two-month range. The next potential barrier is the 50-day moving average at $1.2675, followed by the 200-week moving average at $1.2850.

In addition to the preliminary Eurozone PMI data for February, the minutes from the European Central Bank's (ECB) policy meeting were disclosed yesterday, affirming the likelihood of future rate cuts, albeit not anticipated by Spring. The ECB aims to assess final first-quarter data on inflation, output, and wages before considering any decisive actions. Following a climb to a three-week peak, EUR/USD retreated, falling towards $1.08 and slipping below its 50-week moving average.

The USD experienced a decline this morning following indications in the US Federal Reserve minutes that, although the central bank is not yet close to reducing interest rates, policymakers are expressing concerns about maintaining rates at excessively high levels.

The minutes from the January meeting reiterated the importance of incoming data, emphasizing that the Federal Reserve must be assured of a sustainable return of inflation to its 2.0% target.

Contrary to market fears, the minutes adopted a less hawkish tone, leading to a decrease in the value of the USD after the announcement.  Initially showing strength, the greenback ended up relatively unchanged for the session due to its weakened state post-Fed. The EUR and GBP recorded moderate gains, while the Japanese yen experienced a slight decline.

EUR/USD successfully breached the psychological threshold of $1.08, a short-term resistance barrier in the past week. Currently, the world's most traded currency pair is testing its 200-day moving average just above this level, influenced by a decline in US Treasury yields that exerts downward pressure on the USD.

In addition, the European Central Bank (ECB) released a report indicating that wages in the Eurozone remain relatively high, despite a modest decline in the fourth quarter of the previous year. Negotiated wage growth dropped from 4.7% to 4.5% year-on-year in Q4, signalling a stabilization in the acceleration of wage growth. While other measures of wage growth were already trending downward before this data release, negotiated wages play a significant role in Eurozone wage developments. The impact of robust wage growth on services inflation hinges on the ease with which higher wage costs can be passed on to consumers.

The flash services PMI for January revealed that the index has consistently stayed below the neutral 50 mark for the sixth consecutive month. With the overall outlook for services remaining weak, the prospect of higher wages influencing inflation appears doubtful. Although the ECB is likely to welcome the news of the slight decline in wages, it is anticipated that the central bank will approach monetary policy adjustments cautiously in 2024.

Currently, money markets are indicating a probability of over 50% for a rate cut in April, with an expectation of three additional cuts before the end of the year. This outlook is considered excessively dovish. Consequently, there is potential for the euro to appreciate against the dollar if there is a more hawkish repricing in ECB rate expectations.