RedFX Update: 2 big days for the US & UK
As we reach the 7-months-mark of the Russia/Ukraine war, it’s consecutions on the world’s economy are more and more visible, and winter approaches fast, spiking the energy crisis through Europe.
USD: Tonight, the US Federal Reserve announces its interest rate decision, with most economists expecting a 0.75% increase in rates, although there is some expectation that the Fed will raise by 1%. A 1% rise will strengthen the USD from its already very strong levels. On the other hand, Credit Suisse reports overnight that a 0.5% increase will be a huge negative shock for the USD and will weaken the currency.
EUR/USD fell well below parity overnight, hitting 0.9920 as the market prepared for this evening and reacted with a flight to safety, as Russia’s President Putin said that he will defend territories and “we have lots of weapons to reply, it is not a bluff.”. Europe will continue to suffer an economic slowdown if the situation does not improve, exacerbated by inflation and supply chain issues.
The yield on 2yr notes (indicating expectations of rates in 2yrs time) hit the highest level in 15yrs overnight, showing that the market is pricing in a lot of hikes.
UK: Tomorrow the Bank of England announces its decision on interest rates, updates economic forecasts, and holds a press conference. Current rate is at 1.75%.
If the Bank of England delivers only a 0.5% increase in rates, Credit Suisse predicts a fall to 1.1000 vs the USD. They believe that the UK needs 0.75% or 1% hike, alongside a strong rhetoric from BoE members. Only in that instance do they see GBP/EUR and GBP/USD back above 1.1700 levels.
GBP/USD is currently at 1.1350 and GBP/EUR at 1.1450
Europe: ECB President Lagarde yesterday reiterated her support of more interest rate hikes to battle inflation. Another ECB member said ..” rates are far from the level that would slow the economy.”.. suggesting more rate hikes on the way without fear of an economic slowdown. ECB forecasts do not currently have include large decline in economic growth and the ECB and the ECB seems committed to raising rates.
Rest of the world:
Sweden: The Central Bank raised rates by 1% to 1.75% yesterday and signalled further interest rate increases in the coming months – this will strengthen the SEK considerably in the medium term .. although it failed to boost the currency yesterday.
JPY: The Bank of Japan repeated its stance of maintaining ultra-loose monetary policy, forcing the JPY to historic lows as the rest of the world hikes rates. USD/JPY around 143 has climbed from 110 365 days ago.
Norway: Norges Bank meets tomorrow, and another 0.5% interest rate increase is expected, taking the rate to 2.25%. From here on, they are expected to continue to raise, with 0.5% increments being the most each time.
CAD: The Bank of Canada was swift to raise rates and that ‘front-loading’ seems to have had an effect, with inflation steadying (not rising). Although further rate hikes are expected, the CAD might struggle to find support vs other currencies as it slows rate increase before others, and is swung around by commodity prices affected by the Ukrainian war.
Rates:
EUR/USD 0.9910
EUR/JPY 142.00
GBP/USD 1.1350
GBP/AUD 1.7010
GBP/EUR 1.1450
USD/CAD 1.3350
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