Sterling has enjoyed an 11.5% run higher over the dollar since the low on September 26th. Heading into two key rate decisions, the key question now for clients is where could sterling move to depending on the outcome of the decisions?
Upside into recent highs suggests a 1% appreciation for the pound into sterling selling territory, and downside suggests pound buying and dollar selling approximately 3.7% lower.
Sterling finished broadly lower yesterday as risk appetite dropped, illustrated by a fall in US equities.
Focus this week remains on the Bank of England and whether it will hike by 0.75%, or is there a chance they join the other doves and hike only by 0.50% given that there is an expectation of tighter fiscal policy? The other thing we need to consider is how the vote split will be. We had a three-way split last time around, and similar divisions on the vote could be negative for the pound.
Markets will also focus on:
1. The accompanying policy statement (previous signal has been to act more forcefully if needed), and if whether they indicate to markets where the terminal interest rate is. Currently markets are pricing the terminal rate to be at 4.9% next year.
2. The Bank of England’s new forecasts on economic growth and inflation.
So, not quite as clear cut as many would think on the impact on the pound. To see sterling continue its ‘Rishi’ relief rally, markets will probably need to see a Fed-like rhetoric of hiking rates aggressively to battle inflation. But, in light of the political and expected fiscal changes, this seems very unlikely. Add to this that the trade weighted value of sterling is at the highest since August, and concerns of the impact of hiking rates on the economy, then the Bank of England could well take a cautious approach meaning we could see sterling come off recent highs.
This morning the Nationwide house price survey showed that prices fell the most since the start of the Covid pandemic. Average prices fell by 0.9% to £262,282. The data adds to the drop in mortgage applications yesterday which fell by 10%, highlighting affordability pressures on households.
Today sees the release of October’s manufacturing PMIs, expected to come in at the same level as last month of 45.8.
Eurozone inflation shot to a new record high of 10.7%, driven by higher consumer energy prices, and the economy grew by 0.2%, faster than expected as well. However, bets of interest rate hikes did not increase, with the markets still being driven by last Thursday’s dovish ECB rate statement.
The ECB are in a touchy situation. On one hand the ECB will want to keep hiking aggressively to combat inflation, but on the other, the impending fear of a recession will mean the Bank may want to reduce the size of the hikes, something that ECB president Christine Lagarde commented on yesterday.
December’s rate hike is being priced with a 50% chance of a 0.75% hike.
We saw EURUSD drop further, now around 2% lower than the peak ahead of last week’s ECB meeting, but much of that seems due to renewed buying into the dollar and month-end repositioning.
The dollar continued its bid higher which seems to be driven by month-end repositioning. Overnight, the dollar gave up the gains as markets look towards a potential ‘pivot’ by the Fed.
There seems to be no consensus in what the market believes will be the likely outcome of Wednesday’s meeting, but here are some of our thoughts:
The Fed will likely hike by 0.75%, and may allude to the fact that they may be open to a smaller hike of 0.5% in December, and keep to their status of being data dependent. If this is the case then this would not back the recent speculation in the markets that the Fed WILL slower its pace of hiking, which has been one of the main reasons for the dollar’s recent weakness.
Another factor to consider is the communication the Fed give on their terminal rate expectation. Should this remain as what it is now, around 5%, then yet again it would indicate a further rebound in the US dollar.
For the dollar’s bull run to end, markets will be looking for a categorical ‘pivot’ from their current monetary policy path. Otherwise, it would seem we are quite yet not at the end of the dollar’s run.
Equals Market Analysis– 01st November 2022
Today’s Market Rates
Today’s Interbank Rates at 09:20 am against sterling movement.
GBP>EUR – 1.1613
GBP>USD – 1.1520
EUR>USD – 0.9919
GBP>CAD – 1.5628
GBP>AUD – 1.7923
GBP>SEK – 12.613
GBP>AED – 4.2303
GBP>HKD – 9.0420
GBP>ZAR – 20.951
GBP>CHF – 1.1463
· 08:20 AUD RBA’s Governor Lowe speech
· 14:00 USD ISM Manufacturing PMI(Oct)
· 21:45 NZD Employment Change(Q3)
· 21:45 NZD Unemployment Rate(Q3)
· 22:00 NZD RBNZ’s Governor Orr speech
· 22:30 CAD BoC’s Governor Macklem speech
· 23:50 JPY BoJ Monetary Policy Meeting Minutes
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