Currency Note

Markets look ahead to crunch week for interest rates

By Alex Bennett December 9th, 2022

The week ends with no breakthrough in negotiations to avert next week’s rail strikes, a crippling blow for the UK’s retail, entertainment, hospitality and many other industries this Christmas. There are estimates that more than a million working days will be lost due to industrial strike action in December.

Its another quiet day for data releases across the board. Next week sterling, the euro and the US dollar will all be alert for interest rate decisions across all three of our major currency zones.

The UK government is set to announce the biggest overhaul of financial regulation for more than 30 years in a move dubbed Big Bang 2.0. Various incentive include lifting EU rules, such as the cap on bankers’ bonuses, in an attempt to ensure that London remains Europe’s top financial centre.

Labour leader Sir Keir Starmer has promised that as prime minister he would not carry out a tax raid on the banks. During Labour’s business conference in Canary Wharf yesterday Starmer said he would “not slap a windfall tax on City financial services firms or hike the banking surcharge”.

Next year the US will print and circulate its first ever currency with two women’s signatures on it, Treasury Secretary Janet Yellen and Treasurer Lynn Malerba.

Janet Yellen said: “We’ve made progress in providing greater economic opportunity for women at Treasury and in the economics profession. But we know that much more needs to be done.”

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GBP: New GDP data out on Monday

Sterling approaches the weekend a little down on last Friday against the euro, while it has recovered most of the losses it made early this week against the US dollar.

UK markets are preparing themselves for a busy next week, starting early on Monday with the GDP data release and continuing through the week with inflation and unemployment.

In the previous GDP data release, it was revealed that the British economy contracted by 0.6% month-over-month in September (following a downwardly revised 0.1% decline in August), and worse than market forecasts of a 0.4% fall.

GBP/USD past year

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EUR: Predicted 50bp rate hike from the ECB

It’s been a positive week for the single currency, strengthening against all major rivals, especially the Norwegian krone and Japanese yen, and around 1% against sterling.

For next week, the betting appears to be that the European Central Bank will deliver a 50 basis point rate hike. Danske Bank predicts this will be with “a hawkish twist,” and that it expects the ECB to “present key principles of the end to reinvestments under the APP process (in which reinvestments will almost come to a full stop) and an open-ended wording for more rate hikes to come.” Danske added that this will be a “palatable” compromise to “both hawks and doves.”

USD: Fed to raise interest rate by 50 basis points

The dollar has strengthened generally this week. That includes an almost 3% gain on NOK, but far less spectacular rise against the pound, and it has lost out to the euro marginally.

Data to look out for today includes Michigan Consumer Sentiment for December, and Producer Price Inflation. However, it is Tuesday’s inflation data that will most interest the markets, coming the day before the Federal Reserve’s interest rate decision on Wednesday.

The Fed acknowledged its earlier call of a 75 basis point rate hike next week now seems unlikely, but warned markets not to “think the need to tighten monetary policy further has disappeared.” The Fed now expect 50-basis point hike next week, followed by another 50-basis point hike in February.

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