UK: Weekly FX Market Update 20 September

GBP

• The pound had a torrid week as it fell 3.5% against the dollar, and to levels not seen since 1985 – although it fared slightly better against the euro, falling only 1% on the week.

• After initially being supported by the announcement of the energy support package, GBP/USD also fell after a stronger-than-expected US Consumer Price Index reading.

• The Pound then suffered across the board when UK Retail Sales showed a decline of 1.6% in August – three times worse than the expected 0.5% decline.

• Citigroup published a report on 16th September (the 30th anniversary of Black Wednesday when the pound left the Exchange Rate Mechanism), saying that the surging dollar was “the only game in town” for at least the rest of 2022.

• Can the emergency mini-budget on Friday September 23rd kick-start the UK economy?

This week begun with a bank holiday as a mark of respect to Queen Elizabeth II and her State Funeral, followed by what could be a busy Wednesday, Thursday and Friday.

The US Federal Reserve’s interest rate decision is on Wednesday, with Bloomberg indicating an 80% probability of a 0.75% rate hike and a 20% probability of a 1.00% rate hike. It’s the Bank of England’s turn on Thursday, with a less aggressive rate hike expected. Also courtesy of Bloomberg, there is currently a 90% probability of a 0.5% rate hike from the Bank of England, and 20% probability of a 0.75% hike.

The week is rounded off by a mini-budget on Friday at lunchtime, from new Chancellor Kwarteng, who has already said that he will focus “entirely on growth”. Will the market see this as a positive, or will it focus on the UK’s huge budget deficit and the additional £150 billion of energy support spending?

USD

• Last week’s Core CPI reading was twice what was expected month-over-month, jumping by 0.6% in August rather than the 0.3% expected.

• Since the Jackson Hole symposium at the end of August, the Federal Reserve has consistently spoken of higher interest rates being maintained in order to push inflation back to its 2% target.

• This Wednesday, the Fed sets interest rates, with the former US Treasury Secretary calling for a full 1% rate hike.

• Along with the rate decision, the “Dot Plot” will also be released. This will be reviewed by the market to gauge the Federal Reserve’s interest rate intentions beyond Wednesday’s meeting.

• Fed Chair Powell is set to speak twice next week, on both Wednesday and Friday.

The dollar has been in an uptrend since January 2021, supported in recent months by the Federal Reserves’ interest rate hikes. US inflation is continuing to surprise to the upside, with Wednesday’s Fed meeting expected to result in either a 0.75% or 1% rate hike. Could the outcome of Wednesday’s decision continue to propel the dollar, strengthening it further?

EUR

• The ECB hiked interest rates this month by 0.75% and is openly preparing to hike rates by the same amount in October as well.

• Eurozone annual CPI is rising at 9.1%.

• Russia cut their gas supply to Germany; will Russia ever be seen as a stable energy supplier again? How will Germany and the wider EU cope with the lack of supply?

• European Commission President Von Der Leyen proposed a euro 140 billion levy on fossil fuel producers to help member states deal with the energy crisis.

• The Eurozone economy has been posting positive GDP data. How long can this continue, with exports to China falling and the impending possibility of fuel rationing being put in place?

The euro has managed to stay supported for the past few weeks as the ECB joins the central bank rate hiking party. However, with the Fed setting interest rates on Wednesday, following the Eurozone current account data (which is being released on Tuesday), just how long can it reject the USD’s advances?

The Week Ahead

Tue Sep 20

02:30 AUD Monetary Policy Meeting Minutes

09:00 EUR Current Account

Wed Sep 21

19:00 USD Fed Funds Rate/FOMC Statement/FOMC Projections

19:30 USD FOMC Press Conference

Thu Sep 22

00:01 JPY BOJ Policy Rate/Statement/Press Conference

08:30 CHF SNB Policy Rate

09:00 CHF SNB Press Conference

09:00 EUR ECB Economic Bulletin

12:00 GBP BoE Interest Rate Decision/Monetary Policy Summary (No Press Conference)

Fri Sep 23

12:00 GBP Chancellor Kwarteng announces mini-budget