The Old Lady Takes the Spotlight

• Bank of England to slash the policy rate 25bps to 4.50%. A downside risk for GBP is that at least one MPC member support a larger 50bps cut.

• Sweden inflation overshot expectations in January supporting the Riksbank’s guidance to pause easing.

• Czech National Bank expected to cut rates 25bps to 3.75%

USD stabilized after yesterday’s broad sell-off triggered in part by lower Treasury yields. 10-year Treasury yields edged down to near a three-month low at 4.40% on weaker US services sector growth momentum. The ISM services PMI fell more than anticipated in January to 52.7 (consensus: 54.0) vs. 54.0 in December. The details were soft except for the Employment Index which improved a full percentage point to a 16-month high at 52.3 in January.

The US economy remains in a good place which limits downside for 10-year Treasury yields and USD. The US economy is tracking well above long-run annual trend growth of 1.8%. The Atlanta Fed and New York Fed GDP models both estimate Q1 growth at 2.9% SAAR. Importantly, solid US labor market conditions suggests consumer spending will remain the principal growth driver.

There was no new material insight from US Treasury Secretary Scott Bessent’s interview yesterday. Bessent repeated his 3-3-3 economic policy mantra: boosting real GDP growth to 3%, reducing the budget deficit to -3% of GDP and increasing oil production by 3mn barrels/day. Bessent also downplayed President Donald Trump’s criticism of the Fed. Bessent pointed out that Trump is “not calling for the Fed to lower rates” but instead “he and I are focused on the 10-year Treasury.”

US

Q4 unit labor costs (ULC) and nonfarm productivity are today’s focus (1:30pm London). Productivity (GDP/hours worked) is expected at 1.2% q/q SAAR vs. 2.2% in Q3, while ULC is expected at 3.4% q/q SAAR vs. 0.8% in Q3. Importantly, annual productivity growth is running close to its post-war average of 2.1%. One of our themes for 2025 is that the US is primed for a total factor productivity growth spurt. This is USD bullish and can lead to a further melt-up in global equity markets (see here).

Fed speakers today include: Fed Governor Christopher Waller speaks on the future of payments (7:30pm London), Dallas Fed President Lorie Logan (non-FOMC voter) speaks on the “Future Challenges for Monetary Policy in the Americas” (10:10pm London).

UK

GBP/USD retraced most of yesterday’s gains. Bank of England is widely expected to slash the policy rate 25bps to 4.50% (12:00pm London). The quarterly Monetary Policy Report will be released at the same time. Most indicators of UK near-term activity have declined, and services inflation cooled more than the BOE anticipated in December. A downside risk for GBP is that at least one MPC member supports a larger 50bps cut. The usual suspects that could cast a vote for a jumbo cut are Swati Dhingra, Dave Ramsden and Alan Taylor.

We expect the BOE to stick with its quantitative tightening (QT) plan. Remember, in September 2024 the MPC voted unanimously to reduce the stock of UK government bond purchases by £100 billion over the next 12 months, to a total of £558 billion. There are no compelling reasons for the MPC to change gears on QT as UK 10-year gilt yields are drifting lower again and are largely guided by US 10-year Treasury yields. But if we’re wrong, it would add downside pressure on GBP.

Finally, we expect the BOE to maintain its policy guidance: “A gradual approach to removing monetary policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.” As such, markets should continue to imply between 75 and 100bps of total BOE easing over the next 12 months. In contrast, markets imply an additional 100 to 125bps of ECB policy rate cuts over the next 12 months. Bottom line: relative ECB/BOE policy trend can further weigh on EUR/GBP.

BOE will also publish the January DMP survey of inflation expectations (2:00pm London). In December, 1-year expectations rose two ticks to a nine-month high of 3.0%, while 3-year expectations rose two ticks to a 13-month high of 2.9%. Both series remain well above their series lows of 2.5% in October and will likely keep the Bank of England on a cautious easing path. BOE Governor Andrew Bailey speaks later this evening (9:05pm London).

SWEDEN

SEK is modestly lower versus USD but firm against most other major currencies. Sweden inflation overshot expectations in January, supporting the Riksbank’s guidance to pause the easing cycle. The policy relevant CPIF quickened to 2.2% y/y (consensus: 1.6%, Riksbank: 1.8%) vs. 1.5% in December while CPIF ex-energy rose to 2.7% y/y (consensus: 2.1%, Riksbank: 2.4%) vs. 2.0% in December. Markets will likely trim odds of more Riksbank policy rate cuts, offering SEK support on the crosses.

JAPAN

JPY is outperforming. Bank of Japan (BOJ) policy board member Naoki Tamura argued for a faster normalization cycle. Tamura said “raising short-term interest rates to at least around 1% in the latter half of fiscal 2025 is necessary to reduce upside risk to prices and achieve the price stability target in a sustainable and stable manner.” Tamura is the most hawkish board member as he was the only one to vote in favor of a rate hike in December 2024. Markets continue to price-in a BOJ policy rate of 0.75% by year-end and a terminal rate of 1.00% over the next two years. This seems about right as the BOJ expects inflation to stabilize around its 2% target in 2026. The limited room for a further upward adjustment to BOJ rate expectations curtails JPY upside.

CZECH

The Czech National Bank is expected to cut rates 25bps to 3.75% after pausing the easing cycle in December (1:30PM London). Governor Ales Michl said a rate cut is “very likely” while board member Jan Prochazka noted “the data we have seen so far appear to back my view that the fine-tuning process could resume as soon as in February.” Michl also plans to present a plan to the board to diversify as much as 5% of the CNB’s €140bn of reserves in bitcoin. Markets price-in 75bps of total easing in the next 12 months.
POLAND

As was widely expected, National Bank of Poland (NBP) left the policy rate steady at 5.75% yesterday. NBP reiterated that “in the coming quarters inflation will remain markedly above the NBP inflation target”, signaling no rush to start easing. The swaps market implies steady rates over the next three months followed by a 25bps cut in the subsequent three months. Over the next 12 months, markets price-in a total of 75bps of easing. Governor Glapinski holds a press conference today (2:00pm London).