#interest-rate-expectations

#interest-rate-expectations

Changing expectations about the Fed's stance, a tense geopolitical backdrop, and the impact on inflationary risks have fuelled caution ahead of Chair Powell's comments. Yields and the dollar remain exposed to escalating tensions in the Middle East, as disruptions to energy infrastructure and key supply routes pushed oil prices higher, stoking inflation concerns.

With 2-year gilt yields hitting December highs due to a 40 per cent surge in UK gas prices and oil nearing $80, the Bank of England faces a significant inflationary shock. High-street banks are no longer competing on price but are instead protecting margins against rising swap rates.

When oil prices surge with this magnitude and speed, inflation doesn't just increase gradually; it accelerates rapidly. Energy costs are embedded in every supply chain. A sustained increase towards $90 for Brent crude fundamentally alters the inflation outlook, forcing a re-evaluation of interest rate expectations.

Sterling has surged to $1.38 against the US dollar, its strongest level since October 2021, as a combination of US economic disruption, shifting interest rate expectations and geopolitical uncertainty weakens the greenback. Currency analysts said the move has been driven more by dollar softness than by a sudden strengthening of the pound, creating what some describe as a rare buying opportunity for consumers and businesses needing US currency.

Bitcoin paused on Wednesday after Tuesday's rally. The latter temporarily lifted prices above USD 96,000, the highest level in several months. Profit-taking fuelled today's pullback. Meanwhile, institutional support seems to be returning. Spot Bitcoin ETFs recorded USD 753 million in inflows on Tuesday, marking a second consecutive day of positive flows and the largest daily inflow since early October. Ethereum ETFs mirrored this improvement, attracting USD 130 million.

October's government shutdown throttled the flow of data from federal agencies, making it tough to gauge the economy's health. Neither October nor December's Federal Reserve rate cuts were sure bets, since the central bankers rely on that data, too. Right now, markets think the central bankers will probably maintain current rates at their next meeting Jan. 27-28. But that's a "probably," not a "definitely."

The US dollar was mostly unchanged on Thursday as investors avoided major positioning ahead of the Federal Reserve's Jackson Hole symposium. Market participants remain cautious, with sentiment restrained by concerns about monetary policy and political risks. Attention now shifts squarely to Fed Chair Jerome Powell's address on Friday. Markets are pricing in an 81% chance of a quarter-point rate cut in September. Another cut is expected in December.