UK: Weekly FX Market Update 12 September

Headlines

• GBPUSD traded at a new 37 year low

• New UK Prime Minister Truss announced a two-year energy support package costing possibly £150 billion

• GBPEUR suffered as the ECB hiked interest rates by 0.75%

• Bloomberg WIRP implied UK interest rates will hit 3.5% by December

• Queen Elizabeth II passed away aged 96 years

GBP

Liz Truss, who was installed as Prime Minister on Tuesday September 6th, announced on Thursday 8th September that there would be a huge package to cap UK households’ energy costs for two years, and UK businesses costs for six months. The goal, of course, of this package, is to create an immediate effect to lower inflation, which is currently at 10.1%. However, the government will have to borrow the funds needed to implement the package, and with government debt already running at £2.8 trillion, the market has concerns that the UK is becoming heavily indebted.

The week to come has many data releases. Monday sees the release of UK Gross Domestic Product and Industrial Production, while UK Average Earnings are released on Tuesday and the UK Consumer Price Index on Wednesday.

Thursday of this past week could have feasibly been seen as the most important day for market participants, as the Bank of England was due to meet, and was widely expected to hike rates by 0.5% to 2.25%. However, due to the Queen’s passing, this meeting has been postponed until September 22nd, which is the day after the US Federal Reserve sets its interest rates.

EUR

After the ECB hiked interest rates by 0.75% on Thursday, the Euro appreciated at the end of the week. The ECB stated that over the next several meetings, they expect to raise interest rates further “because inflation remains far too high and is likely to stay above target for an extended period.”

The ECB also announced changes to their growth forecasts, increasing their forecast for 2022 to 3.1% from 2.8%, but lowering their 2023 forecast from 2.1% to 0.9%. President Lagarde explained that a slowing economy will likely lead to more unemployment.

ECB Board member Kazmir added that resolute hikes shall continue due to a lack of alternatives. ECB policymaker Knot said that the curbing of dynamic inflation is the only going concern. Bloomberg WIRP currently gives an 80% probability of another 0.75% rate hike in October.

USD

The US Dollar was supported in the early part of the week as the market worried about the problems facing the Eurozone and the UK, therefore seeking the safety of the Dollar. However, the latter part of the week saw Dollar weaken as the ECB hiked interest rates and the Bank of Japan jawboned the Yen higher. This, despite Fed Chair Powell reaffirming on Thursday that the Fed is focused on reducing inflation to 2%. He also said that the Fed needs to keep going until they “get the job done”.  

RoW

USDJPY has been volatile over the past week. The pair opened around 140.00 on Monday and traded quickly to 144.99 on Wednesday. Bank of Japan governor Kuroda then said that a “rapid weakening of the currency is undesirable”, after which the USDJPY traded back to below 142.00. The market is buying USDJPY as it gets rewarded by a 2.6% interest rate differential between the USD and Japanese Yen. Until the policies of the Federal Reserve and Bank of Japan change, USDJPY could continue to attract buyers.

The Week Ahead

Mon Sep 12

07:00 GBP GDP/ Industrial Production

Tue Sep 13

07:00 GBP Average Earnings Index/Unemployment Rate

07:00 EUR German Final CPI

13:30 USD CPI

Wed Sep 14

07:00 GBP CPI

Thu Sep 15

02:30 AUD Employment Rate

12:00 GBP MPC Official Bank Rate- Postponed to Sept 22nd

13:30 USD Retail Sales

Fri Sep 16

03:00 CNY Retail Sales