s expected by the entirety of the market, interest rates were left unchanged once again. While Chair Jerome Powell reiterated many of the lines from previous statements, there were a few notable changes to the communications that investors perceived as dovish. On the topic of the coronavirus, Powell warned that it was posing a ‘substantial downside risk’ that could negatively impact US growth. He also tweaked the wording regarding the health of the US consumer, stating that household spending was now ‘moderate’ versus the ‘strong’ that was used following previous meetings.

Powell also reaffirmed that the central bank had little appetite just yet to begin considering raising interest rates again after the three cuts that it delivered last year. The FOMC chair noted “we wanted to underscore our commitment to 2% not being a ceiling, to inflation running symmetrically around 2% and we’re not satisfied with inflation running below 2%.’ This continues to indicate the view that the Fed would continue to take a relaxed view of inflation above the 2% target, and that price growth modestly above this level would not necessarily immediately trigger policymakers to vote in favour of hikes.

The FX market did, however, take Powell’s dovish assessment mostly in its stride, with EUR/USD only edging very modestly higher. The rationale for the lack of a more significant move is likely due to the fact that the market is still not pricing in any change in Fed rates for some time yet. We remain of the opinion that rates will be held steady throughout the entirety of the year, a view held by most analysts and much of the market alike.

Bank of England could cut interest rates today

Focus in the FX market today will quickly shift to this afternoon’s Bank of England meeting at midday, which promises to be one of the closest calls we have seen from the central bank in a number of years.

Following a raft of weak inflation, retail sales and growth numbers, the market began feverishly pricing in the possibility of a rate cut at the beginning of 2020. Since then, however, we’ve had a bit of a recovery in UK data – earnings growth surprised to the upside, while the January PMI numbers showed signs of a solid rebound. While we think that at least one, or possibly even two, MPC members will join to the doves and vote for an immediate cut (Vlieghe and Tenreyro perhaps), we think that the committee will tilt towards unchanged rates in either a 6-3 or 5-4 vote.

Today’s meeting promises to be one of the most closely watched in the UK in a number of months, so expect a great deal of volatility around the rate decision at midday today.

Euro rises ahead of German inflation numbers

As noted, the euro managed to edge modestly higher versus the greenback yesterday following the Fed meeting. Another factor perhaps holding it back from more meaningful gains is the ongoing coronavirus situation that has sapped risk appetite and caused investors to favour the safe-havens.

Economic data out of the Euro Area has been pretty light on the ground so far this week, with not much at all to report on that front. Activity will begin to pick-up pace today, in what bodes to be a very hectic couple of days to end the working week. First up will be this morning’s consumer and business confidence data for January. Following positive news on US-China trade relations and the removal of the short-term ‘no deal’ Brexit risk we think that these indicators will surprise to the upside.

Then, investors will have this afternoon’s German inflation numbers to digest. Consensus is for a move higher in the headline number to 1.7% from December’s 1.5%. If confirmed, this would bode well for tomorrow’s Eurozone-wide number and could support the common currency today.