KBC Sunset Market Commentary 06/02/2025 via Trader Talent

KBC Sunset

Thursday, February 6, 2025

Daily Market Overview

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Markets

• The Bank of England today as expected cut its policy rate by 25 bps to 4.50%. The communication post the MPC decision contained some mixed signals, which we in the end see as tilting to the hawkish side. But first the dovish part of the narrative. The vote was 7-2. There was consensus on today’s rate cut. Two members (including Catherine Mann who was seen as being hawkish preferred to cut the policy rate to 4.25%. However, the underlying analyses from the monetary policy report was quite challenging from a monetary policy point of view. The BOE upwardly revised its inflation forecast while downgrading that for this year’s growth. Average 2025 growth was reduced to 0.75% from 1.5%. Growth for 2026 and 2027 was set marginally stronger at 1.5% (from 1.25%). Average inflation was upwardly revised to 3.5% from 2.75% for 2025 and is expected to decline gradually to 2.50% next year (from 2.25%) and 2.0% in 2027 (from 1.75%). Meeting the inflation target in 2027 is also seen conditional to a substantially higher implied policy rate path compared to the November forecast (+0.5 ppts for 2025 on an average of expected base rate of 4.2%, cycle low policy rate at 4.0%). To put it otherwise, potential growth that allows the economy to growth without creating inflation has declined in the wake of the government budget. In its policy assessment, the BOE states that ‘key indicators suggested progress on underlying disinflation in domestic prices and wages had generally continued. There had nevertheless been substantial upside news to the near-term outlook for headline CPI inflation, which was now expected to rise quite sharply in the near term, to 3.7% in 2025 Q3, owing in part to energy prices, before easing again’. The bank concludes that ‘a gradual and careful approach to the further withdrawal of monetary policy restraint was appropriate’. Despite the guarded BoE message, markets still slightly raised expectations on further easing throughout 2025 (two 25 bps steps fully discounted and about 75% of a third one). The message from higher 2025 inflation and lower actual and potential growth is an obvious negative for sterling. EUR/GBP already rose in the run-up to the meeting to test the 0.8375 area after the decision (currently 0.8365 from an open near 0.832). The established 0.822/0.8475 trading range for now remains firmly intact.

News & Views

• Swedish January inflation smashed estimates, including those from the central bank. Headline CPI was flat compared to the -0.6%M/M forecasted, raising the yearly figure from 0.8% to 1%. The Riksbank’s preferred CPIF gauge accelerated 0.4% m/m, defying expectations for a 0.3% decline and picking up from December’s 0.3%. The y/y measure as a result jumped north of 2% again for the first time in eight months. The Riksbank had penciled in 1.8% in December. Prices ex. energy (0.2% m/m) soared to 2.7% from 2%. The Riksbank last month cut the policy rate from 2.5% to 2.25% and signaled it could be the final one. The meeting minutes released earlier this week revealed governor Thedeen was even surprisingly explicit about it, saying “the rate has probably been lowered sufficiently”. Previous cuts are now expected to usher in an economic recovery. Markets were not so certain and still expected one more reduction later this year. Today’s CPI numbers upended that thinking. Odds for another cut slumped from 100% to around 60% currently. The Swedish krone’s recent strong performance enters its fourth day. EUR/SEK currently trades around 11.32 compared to 11.5 at the beginning of the week..

• The Czech Statistical Office for the first time released a flash CPI estimate for January. Inflation rose a faster-than-expected 1.3% m/m to be up 2.8% y/y (down from 3% in December). The upside surprise came on the account of food prices (5% m/m). Core gauges (ex. energy & food) increased by 0.6% m/m and topped the upper bound of the central bank’s 2% +/- 1ppt tolerance range. Services inflation (1% m/m) eased from 5% y/y to a still-elevated 4.7%. This is one of the key inflation risks for the central bank but that didn’t prevent it from cutting the policy rate from 4% to 3.75% shortly after. The move was widely expected. CNB policymakers including governor Michl flagged the move well in advance. KBC Economics expects one more additional cut, to a neutral level of around 3.5%, but sees risks tilted to the downside. These relate to the German economy (on which Czech exports heavily depend) as well as the (indirect) impact of potential US tariffs. The Czech crown appreciates against EUR today. EUR/CZK remains trapped in a tight sideways trading range from a broader perspective.