News & Analysis

CAD

The Canadian dollar has some minor data releases today, however will largely continue to trade inversely to market sentiment on its US counterpart. The loonie ended the day around 1% weaker than its open vs USD, and whilst we do not expect to see as significant a move today, the general sentiment is likely to remain.

USD

Markets whipsawed in the immediate aftermath of last nights Federal Reserve announcement, initially struggling to digest the Fed’s mixed messages, before finally deciding to adopt firmly bullish USD positioning. This caused the dollar to strengthen almost 2% low-to-high on a weighted average against its major peers. The headline decision was that, as expected, the Fed raised rates by 0.75%, with the base for the US- which sets a band rather than an individual base rate- now being 3.75-4%. At the subsequent press conference, Chairman Jerome Powell commented that the Fed did not need to see headline inflation readings themselves to fall before the Fed would be willing to slow interest rate hikes, which markets took as a sign to sell out of the US dollar. However, he did also warn that the Fed still had “some way to go” to curb inflation, and indicated that base interest rates would likely peak higher than previous forecasts, which had seen a 4.5% cap by year end. As a result, the net sentiment was bullish for the US dollar, and the currency will likely remain on the front foot heading towards the end of the week.

EUR

The economic outlook in the eurozone continued to worsen yesterday, putting renewed selling pressure on the single currency. Spanish manufacturing figures showed activity shrink for the fourth straight month. French manufacturing figures hit the lowest level since May 2020, when the first impact of COVID-19 lockdowns were being felt. German manufacturing, which accounts for around a fifth of its economy, also painted a bleak picture, with its 45.1 reading- where below 50 indicates a contraction- being revised down from a 45.7 forecast. The only slight boost to the overall story was that German unemployment figures rose by slightly less than expected, and the national unemployment rate of 5.5% showed a relatively robust labour market. Today, employment data for the eurozone as a whole is being released, and bond market auctions by the French and Spanish administrations will be a further test of market sentiment, but overall the euro looks set to remain on the back foot.

GBP

The big day is finally here for sterling, with today’s Bank of England meeting placing the currency firmly in to the market spotlight. The consensus expectation is that the BoE will announce a 0.75% interest rate hike, which would be the largest sustained single hike in 33 years, and raise the base rate to 3%. Overall financial conditions for the UK have normalised somewhat after the volatility of previous weeks, with the BoE successfully selling £750m of assets off its balance sheet earlier in the week, with reassuringly little drama. Outside possibility remains of a 0.5% hike remains, if the bank if particularly bearish on UK economic growth prospects, or a 1% hike if they aggressively raise inflation forecasts. Nonetheless, monetary policy is only one part of the inflation story in the UK; soaring energy costs, for which the government has no announced fiscal strategy to reign in beyond April next year, are on of the key drivers. Therefore, the base scenario is that the Bank will simply hike in line with expectations, outline that the UK is now beginning a slow recession albeit with cautious optimism about a return to growth at the start of 2024, and effectively hand the baton back to the governments November 17th economic policy statement. If this materialises, we expect to see around a 0.5% gain in the pound.

 

 

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