Currency Note

Markets listen in to Kwarteng’s growth prescription

By Alex Bennett September 23rd, 2022

Sterling swung wildly over the course of yesterday against most currencies as the markets prepared for and then reacted to the Bank of England’s (BoE) interest rate decision, before finally ending the day roughly where it began.

This morning the US dollar has strengthened sharply once again.

The Monetary Policy Committee (MPC’s) decision to raise interest rates was unanimous, but it was completely split on how far, with five of the nine voting for 50 basis points, three for 75 and one for 25. This is the first three-way split since the financial crisis. The end result was a rise to 2.25%, the highest since 2008, and the BoE report said that the UK was probably already in recession.

Today is the Chancellor Kwasi Kwarteng’s mini Budget, which is expected to be a “tax cut bonanza”, according to The Times, a £50bn gamble to break the “vicious cycle of stagnation” as Kwarteng has put it.

Overnight the Gfk Consumer Confidence for the UK reading has come in at a record low of -49 in September, flying in the face of the government’s rescue package on household energy bills.

The week comes to an end for UK data at 9.30 with a first (“flash”) reading for S&P Global/CIPS PMI. Last month services PMI outshone readings from the eurozone – but will it today? We’ll know at 9.30am.

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GBP: Chancellor aims to strong-arm UK out of recession

The new chancellor will be unveiling his package of growth measures shortly, and this could easily move GBP. There has already been plenty of action in the currency markets this morning, with the pound falling sharply against the US dollar.

Yesterday’s split decision from the MPC and relatively conservative 0.5% rise in interest rates has not helped sterling. Neither has the BoE’s suggestion that the country is already in recession.

Data this morning has Gfk Consumer Confidence down to its worst since they started measuring.

We will shortly be hearing PMI data, but the markets will be more focused on parliament, where Kwasi Kwarteng us due to speak at 9.30. Will there be a rabbit pulled out of the hat to surprise the financial world?

GBP/USD past year

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EUR: Euro sinks against dollar

The euro had another broadly negative day, with clear blue water now appearing between EUR and USD as the euro has remained below parity for three days. That has continued with fresh negativity for the euro this morning.

After a topsy-turvy day during which it weakened markedly, the single currency ended up a fraction up on GBP.

Overnight we’ve had Dutch GDP rising at 5.1% and Spanish at 6.8% in the year to the end of Q2.

Flash PMI has just been revealed at an excellent 53 for services in France but just 45.9 for composite PMI in Germany, well below expectations. However, German manufacturing PMI was as expected at 48.3.

USD: Dollar ends week with fresh impetus

The dollar’s extraordinary week continues right to the end, rising strongly against the euro and pound this morning.

The dollar has gained two cents on the pound this week, as the impact of the Federal Reserve’s 75 basis point interest rate rise is set against the BoE’s more dovish 50 point rise. The escalation of the war in Ukraine, with Russia now imposing conscription, has also encourage a “risk off” strategy by investors looking for safer assets.

On the data front the week ends with PMI readings and a speech by Federal Reserve chair Jerome Powell at 7pm UK time.

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