Currency Note

Currencies at risk of interest rate expectations

By Alex Bennett September 20th, 2022

The US Federal Reserve Building

Sterling moved gently up and down yesterday before ending the day roughly where it started, only fractionally up on its lowest position since early 2021 against the euro and since 1985 against the US dollar.

However, in early trading today the pound has opened strongly.

There were no data releases yesterday in the UK as the nation watched Queen Elizabeth ll’s state funeral.

There was little to excite the markets elsewhere in the world either, although construction output was much higher in the eurozone than expected in July.

The big event of the week is the Bank of England’s interest rate decision on Thursday. Various competing factors include the government’s £150bn energy bills relief package for households and business. This is likely to curb inflation in the short term but may fuel it in the longer term.

The Bank’s Monetary Policy Committee (MPC) wishes to look resolute on inflation, but risks tipping the country into recession (or further into recession) if it raises interest rates too fast. Hence the MPC is likely to be split between a 25, 50 or 75 basis interest rate change, even while the US Federal Reserve has, according to analysts, a 20% chance of raising interest rates by 100 basis points.

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GBP: Pound starts working week on the up

There was little movement for GBP in the currency markets yesterday, with the public holiday to mark the Queen’s funeral. This morning the pound has strengthened by roughly 0.2% against the euro and US dollar.

We have to wait until tomorrow for any major data releases, with CBI Industrial Trends Orders for September.

However the week gathers pace rapidly after that, with the interest rate decision on Thursday midday from the Bank of England. Friday is the chancellor’s fiscal event/mini-budget, as His Majesty’s government gets down to work following the period of mourning.

GBP/USD past year

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EUR: Markets wait for speech by Lagarde

The euro remained largely unchanged in a quiet day for data yesterday. However it remains at its strongest against the pound since early February 2021 (when the pound began pulling away due to its better strategy on vaccines).

It weakened to below parity against the US dollar midday yesterday but regained strength in the afternoon session.

Construction output in the eurozone in July increased by 1.5%, much better than the 1.2% drop expected.

There were also speeches by several members of the European Central Bank’s interest rate setters, and ECB President Christine Lagarde will speak later today.

This morning we have had Producer Price Inflation (PPI) from Germany, which shot up to 7.9%, from 5.3% last month.

USD: Fed considers historic rate rise

The dollar maintained its strong position against the euro and pound yesterday, in a start to the week devoid of high-level data for the markets to feed on. This morning it has declined a little, despite reports that the Fed has an outside chance of raising interest rates by 100 basis points tomorrow, which would be its highest for 40 years.

It’s all about housing in the early part of the week, with the NAHB housing market index falling for the ninth straight month yesterday, to 46, and the lowest level since May 2020.

Later today there will be housing starts and building permits for August and tomorrow is existing home sales. With mortgage rates rising along with interest rates and prices at record highs, almost all housing metrics are forecast to decline.

The week’s big event, indeed the month’s big event, is tomorrow with the Federal Reserve’s interest rate decision.

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