The Swiss National Bank reduced interest rates and cited the strength of the franc as the rationale for the decision. This was the most unexpected event that occurred during a week that was packed with meetings of central banks. A decline of more than one percent occurred overnight for the Swiss franc, which was the best performing G10 currency of 2023. This trend continued on Friday, with the USD/CHF exchange rate increasing by 0.4% to 0.9009, bringing it closer to parity.
This decision has caused traders to reevaluate the Federal Reserve’s expected future measures, which comes in the aftermath of the Federal Open Market Committee meeting that took place this week. During the meeting, officials confirmed the likelihood of three interest rate decreases this year, provided that the economic data permits it. After the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, the United States central bank sharply upgraded its outlook for growth in 2024. Thursday’s data suggested that the United States economy remained on solid footing.
This was the case despite the fact that sales of previously owned homes increased by the most in a year in February. According to this, the Federal Reserve does not appear to be in any hurry to reduce interest rates in the future. Having said that, experts at ING released a report in which they stated that “the jump in the dollar appears overdone. Earlier this week, the Federal Reserve gave a very clear message: some resilience in activity indicators will not be a barrier to reducing as long as inflation shows downward momentum. This message was sent out by the Fed.
Following the Bank of England’s decision to maintain the status quo on Thursday, the pound sterling to dollar exchange rate (GBP/USD) sank by 0.5% to 1.2588, reaching a one-month low. However, two members of the Monetary Policy Committee (MPC) retracted their demands for a rate hike in response to the softening of inflation. According to a report that was published in the Financial Times on Friday, the Governor of the Bank of England, Andrew Bailey, suggested that the anticipation of interest rate reductions this year was not “unreasonable.”
According to ING, “Markets are largely reading this as an acknowledgement that cuts aren’t too far away,” and they are now increasingly persuaded that the Bank of England will begin easing in June (20bp priced in), in addition to beginning to bet on a move in May (7bp priced in). Despite the fact that eurozone activity data continues to portray a gloomy picture for the region’s industrial outlook, the euro to dollar exchange rate traded 0.4% lower to 1.0814 per dollar.
As inflation is on its way back to the bank’s target of 2%, the President of the Bundesbank, Joachim Nagel, stated on Friday that the European Central Bank may be in a position to reduce interest rates before the summer holiday, probably in June. Additionally, the statements add Nagel to a growing list of officials who appear to be in favor of a cut in June. Furthermore, they imply that the European Central Bank (ECB) will be the second major central bank, following its Swiss counterpart, to begin unwinding a record streak of rate hikes.
