How many more hikes?

This week’s blockbuster data calendar did not disappoint, although, as expected, the Fed and ECB meetings were less exciting from a market perspective than in recent months. The main events instead came from the economic data, which to the admission of the major central banks is now crucial in determining how policy is now calibrated. On Monday, flash PMIs out of Europe and the US showed similar themes on the surface, with slowing overall growth conditions and growing divergence in manufacturing and services activity, but blindingly diverging themes in terms of their composition. In the eurozone and the UK, growth conditions were weighing on overall levels of employment and the extent to which service sector firms were able to pass on higher costs to the end consumer. Meanwhile in the US, where the PMIs pointed towards a quarterly growth rate of 1.5% annualised in Q3, renewed output price inflation was reported. This sparked a theme that was ultimately going to persist throughout the week and play out in EURUSD. That is, the acknowledgement by markets that the Fed was much more likely to extend its hiking cycle beyond this month than the ECB, where it looks like the terminal rate has likely been hit. While this wasn’t necessarily visible in the central banks communications, where the tone taken was awfully similar, it was put on full display by the contrasting advanced Q2 growth rates.

Next week, growth conditions are going to remain front and centre with Chinese PMIs and eurozone GDP data released. Furthermore, July’s US payrolls will also be read with underlying growth conditions in mind. The incoming data will help inform the key question in developed markets right now: how many more hikes are coming? In terms of outright answers, only the Bank of England and the Reserve Bank of Australia can provide them next week. To that end, we expect a 25bps hike in the UK to 5.25% and a hold in Australia’s Cash Rate Target at 4.1%, although we note that the risks are tilted to the upside. In emerging markets, the story is a bit different, with the central bank of Brazil expected to start its easing cycle. Here we expect a minor 25bp cut in the Selic rate to 13.5%, but the risks are of more aggressive easing.

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

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