UK: Weekly FX Market Update 26 September

GBP

• GBPUSD makes new all-time low at 1.0350 after suffering the 5.5% drop by week-end. Two where the “shocks” to deal with: Firstly, the US Federal Reserve lived up to their hawkish mantra and hiked US rates by 0.75%. Secondly, it turned out that the mini-budget was not a mini budget after all.

• The mini-budget was described as the biggest fiscal event since 1972, with the Financial Times reporting that the cost of the combined tax cuts will be almost £45 billion.

• Amongst other changes, the planned National Insurance hike was cancelled; top tier tax was cut from 45% to 40%; and the basic rate tax rate was cut to 19p [source].

• Stamp duty on house purchases was eliminated on houses that cost less than £250,000. The market has now priced in a rate hike of 1% in November.

• GBPEUR fell to an 18-month low, having dropped 3%.

This week is light on economic data releases. Friday sees the release of UK Current Account and Final GDP data, and some Bank of England members are expected to speak throughout the week.

EUR

• EURUSD slumped lower by 3.5% last week as the market bought US Dollars after the Federal Reserve’s rate hike on Wednesday.

• It fell again after news that the Yamal-Europe pipeline had been stopped [source]. The pipeline connects the gas fields from Russia to Poland and Germany via Belarus.

• Giorgia Meloni the right-wing leader of the Brothers of Italy won a clear majority in the Italian elections yesterday. The market now wonders what changes she will make to Italy.

• Russia starts annexation voting for territories under Russian army control on Friday September 23rd.

The referendums taking place between Sep 23rd and Sep 27th could result in a dangerous escalation in the war and consequently prove to be a negative factor for the euro. President Putin has stated that he will defend any attack on Russian soil, and if he deems the stolen territories to be Russian soil, could he see his threat through to use all means at his disposal, which could include nuclear?

On the data front, this Wednesday (Sep 28th), ECB President Lagarde speaks, and Friday sees the release of Eurozone CPI. Will Eurozone CPI push the ECB to hike by 0.75% at its next meeting in October?

USD

• The Federal Reserve Chairman Powell reiterated his focus on defeating inflation.

• The Federal Open Market Committee dot plot indicated that interest rates were expected to reach 4.4% by end of 2022, and increase to 4.6% in 2023, forcing investors to change their view of rate cuts in 2023.

• Adding to this bullish US Dollar buying are other currency woes.

This week, US Consumer Confidence is to be released on Tuesday (Sep 27th) and the Fed’s favoured inflation gauge, Personal Consumption Expenditure, is released on Friday (Sep 30th).

The US Dollar index, the measure of USD strength and weakness against a basket of currencies, is reaching a high point from a technical perspective. Could it pause for breath, or could the dollar strength story continue into month’s end?

RoW

• The Bank of Japan (BoJ) sold USDJPY in unilateral intervention last Thursday.

• The BoJ maintained its ultra-easy monetary policy at its meeting last week, encouraging investors to buy USDJPY.

Do these actions imply that the BoJ is merely trying to slow down the pace of the Yen’s weakness?

Events for the week ahead:

Mon Sep 26

00:00 EUR Italian Election results

00:00 JPY BoJ Governor Kuroda speaks

14:00 EUR ECB President Lagarde speaks

Tue Sep 27

14:35 GBP MPC Pill speaks

15:00 USD Consumer Confidence

Wed Sep 28

08:15 EUR ECB President Lagarde speaks

09:15 GBP MPC Cunliffe speaks

Thu Sep 29

00:00 EUR German Prelim CPI

12:30 GBP MPC Ramsden speaks

13:30 CAD GDP

13:30 USD Final GDP

Fri Sep 30

CAD Bank Holiday

07:00 GBP Current Account/Final GDP QoQ

13:30 USD Core PCE Price Index