KBC Sunset Market Commentary 19/06/2025 via Trader Talent

KBC Sunset

Thursday, June 19, 2025

Daily Market Overview

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Markets

• Market positioning about the near term Bank of England’s policy rate path has been quite volatile over the past months. Going into the May decision, investors expected the UK central bank to ditch its gradual rate cut cycle to give the economy additional backing going through the turbulent tariff period. They were wrongfooted. The BoE indicated that without the US trade threat, it even would have been a close call between doing nothing and a 25 bps rate cut. The latter eventually was the preferred option in a three-way split (two out of nine in favor of status quo, two in favor of larger 50 bps rate cut), but with the “gradual cutting pace” still in play. A significant upward surprise in April UK inflation numbers added to the hawkish repositioning on UK money markets up to the point were they discounted only one additional rate cut this year. An awful labour market report and more moderate June (services) inflation later, traders again took a less hawkish view going into today’s decision. This time it paid off, though the Gilt market reaction shows that some still need convincing. UK Gilt yields drop by 2.5 bps (2-yr) to 4.4 bps (5-yr). EUR/GBP didn’t budge near 0.8550. The BoE kept its policy rate unchanged at 4.25% in a 6-3 vote. BoE MPC Taylor joined the ranks of long-standing doves Dhingra and Ramsden. Given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. By sticking with this guidance, the BoE drops a clear hint that they’ll extend the quarterly 25 bps cutting cycle in place since August of last year at the next policy meeting (Aug 7) when an updated Monetary Policy Report will be available. At today’s brief update, the BoE admits that underlying UK GDP growth appears to have remained weak and the labour market has continued to loosen. Risks to the inflation outlook (broadly at current 3.4% Y/Y pace throughout the remainder of the year before falling back towards 2% target next year) remain two-sided. Persistent wage growth and consumer services inflation, higher oil prices and tariff-related price uncertainty vs downside risks stemming from potentially weaker demand.
• The absence of US investors (Juneteenth) holiday, Powell’s steady hand at yesterday’s press conference and the empty EMU eco calendar set the tone for dull trading on European FI and FX markets. EMU swap yields rise by up to 2 bps at the very long end of the curve with EUR/USD going nowhere at 1.1480. European stock markets are exception to the rule. They slide by up to 1% and Brent crude prices return to this month’s high near $78/b given the possible escalation in the Israeli-Iran conflict (US involvement?).

News & Views

• The Swiss National Bank (SNB) reduced its policy rate by 25 bps; bringing it back to 0%, as inflation since the previous policy meeting in March decreased more than expected. Headline CPI price declined by 0.1% Y/Y in May, amongst others due to a slowdown in tourism prices and lower oil prices. The SNB further lowered its (conditional) inflation forecast for 2025-27 to 0.2%, 0.5% and 0.7%. Inflation remains in the lower half of the 0%-2% price stability range over the policy horizon. The central bank maintained a 1%-1.5% growth forecast for 2025 and 2026, but remains prepared to adjust policy if necessary and is willing to be active in the FX market. The bar to return to negative interest rates (deployed between 2015 and 2022) is high. The SNB is well aware of the undesirable side-effects and challenges. The market scaled back expectations on a September rate cut (< 50%). The franc strengthened modestly to EUR/CHF 0.9385.
• The Norges Bank (NB) unexpectedly lowered the policy rate for a first time since hitting peak rates in December 2023 by 25 bps to 4.25%. The central bank assesses that inflation declined since the March policy meeting and expects a stronger disinflationary process for the coming year than previously as witnessed by the reduction in the projected path for CPI-ATE to 3.1% this year (-0.3%), to 2.7% (-0.2%) next year, 2.2% (-0.1%) in 2027 and 2.1% in 2028. This allows to start a cautious normalization process with tight monetary policy still contributing to cool the economy. The NB estimates the policy rate near 4% by the end of this year and at 3% end 2028. Interestingly, mainland growth was upwardly revised for this (1.6%, +0.4%) and next year (1.4%, +0.2%). The unemployment has increased somewhat from a low level and output is now close to potential. The Norwegian krone loses modest ground (EUR/NOK 11.54 from 11.48).