Following the FOMC meeting, the DXY Index retreated from its intra-day high of 103.9 to 103.5, ending the session higher by 0.2% for the first time in four days. Despite the Fed revising its 2025 core PCE inflation forecast upward to 2.8% from 2.5% (previously projected in December), the US Treasury 10Y yield declined by 4 bps to 4.24% for the third session. The Fed made no changes to the direction and magnitude of its December rate-cut projections, maintaining expectations for two cuts in 2025, two in 2026, and 1-2 in 2027.
While the Fed attributed this year’s higher inflation to tariffs, it maintained its forecast for inflation to resume its decline over 2026-2027 to the 2% target on modestly slower GDP growth slightly below 2% over its forecast horizon. The updated outlook reflected higher short-term inflation expectations over the next 12 months, while longer-term expectations remained steady. The S&P 500 Index rose 1.1% to 5675, with investors encouraged by the Fed playing down “Trumpcession” fears and hopes of more Fed cuts to support growth.
Although the Fed’s inflation forecasts appeared to align with US Treasury Scott Bessant’s assessment that the impact of inflation from Trump’s tariffs would be transitory, Fed Chair Jerome Powell stressed that the forecasts could change because of the unusually elevated level of uncertainty. Before the FOMC, many Fed officials reckoned tariffs would be inflationary if the US and other countries engaged in a lasting tit-for-tat tariff war, a prospect which markets cannot rule out because of Trump’s upcoming reciprocal tariffs in April. All said, the DXY is still inside the 103-104 range set on March 10th.
BANK OF ENGLAND MEETING
Per our BOE Meeting preview note on Monday, we expect the Bank of England is expected to keep its bank rate unchanged at 4.50% today. Following its 25 bps cut on February 6th, the BOE expected higher global energy costs and regulated price changes to lift CPI inflation to 3.7% YoY in 3Q25 before resuming its decline to the 2% target. Indeed, CPI inflation rose to 3% YoY in January from 2.5% in December, while core inflation increased to 3.7% from 3.2%. However, this did not deter the OIS market from pricing two more BOE cuts in May and September this year. BOE Governor Andrew Bailey told the House of Commons Treasury Committee on March 5th that the US-led trade war was the wrong way to fix imbalances by exposing the UK and world economies to substantial risks. While GBP/USD kept near its pivotal 1.30 level, GBP bulls should be mindful of the retreat in the 10Y Gilt yield from its 2.94% high to 2.80% over the past week.
Apart from growth risks from tariffs, GBP bulls should be mindful of Chancellor of the Exchequer Rachel Reeves’ Spring Budget on March 26th. The Chancellor will struggle to meet its self-imposed fiscal rules because of disappointing growth, higher borrowing costs, and Prime Minister Keir Starmer’s commitment to bolster defence spending. Following the 0.1% contraction in January’s GDP, the Office of Budget Responsibility (OBR) will likely lower 2025’s growth forecast from 2%. Reeves faces difficult choices to meet the fiscal rules, with each option (e.g. higher taxes and welfare spending cuts) carrying significant political and economic consequences with potential backlash from MPs and voters.
SWISS NATIONAL BANK MEETING
USD/CHF is at the floor of a two-week range between 0.8760 and 0.8865. The Swiss National Bank is widely expected to lower rates for the fifth time by 25 bps to 0.25%, which the OIS market reckoned could be the final cut for 2025. Due to a strong CHF and a sluggish economy, February CPI and core inflation were subdued at 0.3% YoY and 0.9%, respectively. On March 1st, the SNB indicated readiness to reintroduce negative interest rates (if necessary) to keep inflation within the official 0-2% target and expressed openness to forex interventions to counter the CHF’s haven status.
However, a lot has changed since March 1st. Although the SNB forecasted the Swiss economy to expand by 1-1.5% in 2025 vs. 1.3% in 2024, the outlook faces downside risks. The EU economy is pulled in both directions from the US-EU tariff spat against heightening global trade tensions and the European Commission’s proposal for a “ReArm Europe” Plan. The Swiss economy is not immune to Trump’s threat to impose a 25% tariff on pharmaceutical products in April. America has been Switzerland’s most important goods market after the Covid-19 pandemic, with pharmaceutical products representing about half of its exports to the US.
Quote of the Day
“Strive not to be a success, but rather to be of value.”
Albert Einstein
March 20 in history
Albert Einstein submitted his paper, "The Foundation of the General Theory of Relativity", in 1916.
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