September Overview

 

• European Central Bank raised interest rates 0.25%
• The Federal Reserve held rates.
• The Bank of England held rates.
• Swiss National Bank held rates.

 

September was another poor month for the pound, losing 4% versus the US dollar, taking the losses to 8.8% since mid-July. The GBP weakness, in general, seems counter-intuitive to many because we finally saw UK inflation drop to a more comfortable level – 6.7% - and the Bank of England paused interest rate hikes for the first time in 15 meetings. Naturally, this would have all felt more like a win for the UK.

However, the key driver of short-term currency strength is interest rates, and therefore, the expectation of lower interest rates hit the pound hard, and we saw GBP/USD fall to the lowest rate since March, and GBP/EUR since May.

The ECB raised interest rates by 0.25% to 4.00% but signalled that this could be the last hike in the current cycle, as they are increasingly worried about a European recession. At the same time, the US Federal Reserve and Swiss National Bank both held rates steady.

The US dollar continues to strengthen despite the US Fed holding rates for the foreseeable future. 

There are various reasons for this, but these are my top three:

• The Fed's decision to hold rates was very much expected and, therefore, 'priced in'. On the other hand, the Bank of England's pause came as a relative surprise.
• The dollar has been subject to 'safe-haven buying' as investors move out of riskier assets with a potential US government shutdown still unresolved.
• Energy prices soared in September to 1-year highs, and Brent Crude climbed to just over $95 per barrel, adding more fuel to an already raging fire.

 

October Outlook

 

• All eyes on growth and inflation data
• European Central Bank rate meeting on 26th October
• US Federal Reserve and Bank of England meetings in early November

 

October looks to be a quieter month regarding big market-moving data and events. However, we certainly want to avoid getting complacent with the recent volatility we have seen in FX markets. 

Dates to look forward to in the first part of the month are UK GDP, released on 12th October, and US and UK CPI inflation data, released on the 12th and 18th October, respectively. 

These data points will feed into the decision-making processes of the European Central Bank on 26th October and the US Federal Reserve and Bank of England meetings in early November.

Insights from Bloomberg indicate that , and both the Euro and sterling have weakened off the back of this reducing expectation. However, if that likelihood starts to increase due to economic data releases over the coming weeks, it could have a strengthening effect on the currencies, and that is where the potential volatility lies. 

At Moneycorp, we’ll be remaining vigilant with crucial central bank decisions still on the horizon. 

*Source: Bloomberg analytics. Bloomberg takes forecasts from several large banks to give an indication of the market’s expectations of significant central bank decisions

All figures sourced from Bloomberg unless otherwise stated.