The dollar maintains its upward trajectory amid expectations of prolonged higher US interest rates, fueled by hawkish remarks from Fed Chair Jerome Powell. Powell’s indication that policymakers will exercise patience in slashing rates, given persistent high inflation readings, has reinforced market sentiment for a delayed easing cycle. Today’s release of the Beige Book, along with insights from the Fed’s Mester, may offer further clues on the strength of the US economy and the trajectory of interest rates. The market is currently pricing in potential 25-to-50 basis point reductions in the Federal Reserve rate starting in July or September.
In contrast, Bank of England Governor Andrew Bailey suggests a divergent path for UK rate cuts, with today’s inflation data likely to support the case for monetary easing. Bailey’s stance underscores a growing divergence in central bank policies, with the Bank of England potentially moving ahead of the Federal Reserve in initiating rate cuts. His remarks highlight the ongoing debate surrounding the timing of monetary easing globally, with Bailey noting a higher level of “demand-led inflation pressure” in the US compared to the UK. Moreover, he cites “strong evidence” of price pressures easing in the UK, aligning with economists’ forecasts of a decline in March CPI to 3.1% from 3.4%.
Meanwhile, geopolitical tensions in the Middle East appear to ease momentarily, reflecting in a slide in crude oil prices, with Brent futures trading below $90 a barrel. However, the US’s plan to impose new sanctions on Iran targeting its missile and drone program following the weekend’s attack on Israel underscores lingering risks. White House National Security Advisor Jake Sullivan announced Tuesday that sanctions would be unveiled “in the coming days,” adding to geopolitical uncertainties. Additionally, China’s exports to Russia witnessed a decline in March amidst escalating threats of war sanctions from the US. Oil markets remain cautious as traders await Israel’s response to Iran’s weekend attack, while gold holds steady near record highs, reflecting ongoing market apprehensions.