Fed provides relief – Focus on BoE and SNB

The Fed

US markets breathed a sigh a relief following the Federal Reserve (Fed) decision. The Fed kept its policy rate unchanged as expected, cut the growth forecast and lifted its inflation outlook quite notably but Chair Jerome Powell stressed out that the potential impact of tariffs on inflation would be ‘transitory’ – implying that the Fed could continue to ease policy to support growth. And more importantly, the Fed decided to reduce the pace of Quantitative Tightening (QT) – a move that eases the tightening of the financial conditions.

As such, the Fed elegantly downplayed the long-term impact of rising inflation while cutting its growth forecast. The dot plot showed that the Fed officials continue to foresee two rate cuts on average this year, and activity on Fed funds futures now gives around 70% chance for the next cut to land in June. The decision was more dovish than expected.

The US 2-year yield slipped below the 4%, the 10-year yield eased below 4.25%. The S&P500 jumped more than 1%, Nasdaq 100 gained 1.30%, the Dow Jones recovered 0.93%, the mid-cap stocks jumped 1.26% while the Russell 2000 led gains with a more than 1.50% rebound on relief that the Fed – though cautious – is not planning to deviate from its rate cutting and policy easing plans, as again, the inflation peak due to tariffs would be ‘transitory’.

In the FX, the US dollar index rebounded on the back of a dovish and supportive Fed stance. It’s important to note that up until recently, the dovish central bank expectations would have a weakening effect on currency valuations as lower yields reduce the natural attractivity of a currency. BUT right now, the currency pricing is influenced by growth expectations. Therefore, a more dovish Fed stance increases US growth expectations, tempers the recession odds, and supports the US dollar.

The ECB

Elsewhere, the EURUSD eased below the 1.09 mark. Inflation in the Eurozone came in lower than previously printed for February, wages and labour costs eased in Q4. The latest data brought the possibility of another rate cut from the European Central Bank (ECB) before it pauses, though pause looks more likely in the next meeting due to massive fiscal spending plans. Either way, optimistic shift in EZ growth expectations remain supportive of the euro against the USD and sterling though the appreciation will likely slow provided that most of the optimism is already priced in.

The BoJ

The USDJPY resisted near the 150 offers and is swiftly sold on Bank of Japan’s (BoJ) decision to maintain its rates unchanged citing the geopolitical and trade uncertainties. Here as well, not rushing toward policy normalization is supportive of growth expectations and the currency.

The BoE

Cable keeps bumping its head against the 1.30 offers before the Bank of England (BoE) decision due today. The BoE is expected to stay seated on its hands at today’s meeting, but the MPC landscape is quite not smooth: 7 members out of 9 will probably vote for no change, while two doves are expected to favour a 50bp cut. Investors are feeling dovish regarding the upcoming BoE meeting given that the British growth numbers have taken a hit from the governments’ tax raising plans while the rising gilt yields decreased the spending potential. And the weakening potential for government spending increases the BoE’s ability to support the economy with a more supportive monetary policy, and that could be positive for sterling. But yes, it’s a bit stretched. If sterling breaks the back of the 1.30 offers against the US dollar, it will be thanks to a stronger depreciation of the US dollar than conviction in sterling.

And the SNB

Last but not least, the Swiss National Bank (SNB) is expected to announce a 25bp cut today. Mounting geopolitical and trade tensions between the U.S. and the rest of the world have largely kept neutral, non-EU Switzerland out of the direct line of aggressive tariffs. The Swiss franc has strengthened against the dollar since the start of the year while losing ground against the euro—its biggest trade partner.

This is the best of both worlds for Switzerland: a stronger franc against the dollar helps keep energy prices and inflation in check, while a softer franc against the euro preserves what remains of Swiss competitiveness against European peers, or at least prevents further deterioration.

The SMI index has gained almost 14% since the start of the year, as Swiss companies benefited from sectoral rotations. The high concentration of defensive names—such as pharmaceuticals and consumer staples—positions Swiss stocks well. Additionally, Switzerland’s diplomatic relations with the Trump administration remain manageable for now.

As such, the SMI could continue to benefit from rising appetite for defensive and value stocks, as well as a supportive SNB policy. Rates in Switzerland will likely stay low as long as inflation remains in check—and inflation is now back to 0.4% year-on-year. We maintain our preference for Swiss stocks.