Weekly Brief

Another week for big rate hikes?

16 September 2022

Rate alert

GBP/USD breaks below 1.1400 for the first time since 1985, as GBP/EUR drops to a 20 month low 

The pound has fallen sharply against the USD, EUR and other major currencies overnight, as UK Retail Sales sank 1.6% (MoM/Aug), marking the biggest decline in a year and unwinding the 0.4% gain in July. The report was far worse than had been expected, and has been impacted by the rapid rise in the cost of living, which is now clearly impacting UK consumer spending.GBP/USD quickly broke below the 1.1400 support for the first time since 1985, with the pair being further impacted by the continuation of the bullish dollar theme, which has also accelerated after the stronger than expected US inflation report on Tuesday. GBP/EUR has also now slipped to a 20-month low at just under 1.1400.


Thoughts from the dealing desk

“The pound continues on the back foot to end this week which continues its trend on and off over the last few years as a risk-off currency battling against the likes of Brexit, COVID, the war in Ukraine and global recession concerns. Following this Monday’s UK bank holiday with our majesty the Queens funeral, all eyes for next week turn to monetary policy and economic performance. Wednesday will see the US interest rate decision with a predicted 75 basis point hike to 3.25%. This may have less benefit to USD sellers than anticipated though as there is an ongoing market expectation that countries central banks will hike rates in light of growing inflation. With concerns over a US recession now, which is evidenced from the fall in oil prices, the safe-haven dollar may not continue to see the gains it has enjoyed recently, particularly since the start of the Russian/Ukraine war. However, Natwest has stated their concerns that parity on GBP/USD in not out of the question due to a likely chance of recession in the UK. On the contrary, despite negative growth for Q2, Goldman Sachs have predicted 0.4% growth in Q3 for the UK and could be a large determining factor in causing a well-needed sterling rebound as you need two successive quarters for a statistical recession. With UK inflation easing slightly to 9.9%, could the economic outlook for the UK improve? Andrew Bailey from the BofE will share this insight on Thursday with the interest rates expecting to be pushed 50 basis point to 2.25%. Expect a lot of market volatility around these events. From my standpoint, the tone and subjects mentioned in the speech after the rates announcement will carry more weight if the rhetoric of UK recession continues.”

Sam Mills, Private Dealing Manager



Recent economic data from the UK has been a bit of a mixed bag, but key inflation and employment data gave markets a lift, albeit on a temporary basis. Much the same as everywhere else just now, inflation is the one that really matters, and having surpassed the key 10% threshold last month, UK inflation surprisingly dipped just below at 9.9% through August. Falling petrol prices were the main driver (sorry), and whilst the decline can be considered hardly spectacular, the drop marked the first such decline in UK inflation for more than a year. When it comes to inflation, we will all celebrate any drop at the moment.

As for the Bank of England (BoE), their latest quarterly inflation survey has unsurprisingly shown that UK public inflation expectations surged for the coming year at 4.9%, with a drop to 3.2% earmarked for the 12 months following. Interestingly enough, 5-year inflation expectations still remain at 3.1%, which if proven would see UK inflation remain well ahead of the BoE’s target level, which remains at 2% for now. Unsurprisingly, inflation expectations are now at their highest level since the BoE’s survey was first introduced back in 1999.

Talking of the BoE, next week’s delayed meeting is expected to conclude with another 50bps rate hike, pushing the official cash rate up to 2.25% in the process, as the BoE continue in their attempts to impact surging inflation. For the pound to surge on the day, the BoE would likely need to accompany any hike with an extremely hawkish message on rates, which seems unlikely given the challenging economic backdrop, notwithstanding the slight improvements on expectations we have highlighted above.

As for the pound, well GBP/USD had a cracking start to this week, driven by that surge in risk appetite. For a spell, the pair even moved over 1.1725. However, the pound ran into a US inflation wall, and quickly succumbed to dollar strength, pushing back to just under 1.1500 by yesterday’s European close. GBP/EUR looked as though it was going to break back above 1.1600, but was unable to sustain the rally yesterday, and has since slipped back to around 1.1500.

What to watch for next week: Bank of England meeting (Thur), S&P Services PMI (Fri)


The latest German inflation reading came out bang in-line on market expectations, with the key Harmonized Index of Consumer Prices (YoY/Aug) remaining at 8.8%. On Monday, the influential IFO institute warned that Germany risks falling into recession next year, as the winter energy crisis bites. The government have responded by establishing a committee of experts whose task will be to create proposals that can combat the soaring cost of heating and gas, German Chancellor, Olaf Scholz announced yesterday.

The latest ZEW Survey highlighted the challenges for German businesses, as sentiment continued to deteriorate at an alarming rate. All components of the ZEW remain depressed, with Economic Sentiment dropping to -61.9. Elsewhere, Spanish inflation remains locked above the key 10% region, with the latest data highlighting a slight increase to 10.5% during August.

As for the single currency, well it was a tale of two halves for EUR/USD this week, with EUR/USD surging back to a near 1.0200 high, before collapsing alongside the other major dollar pairs after the US inflation print on Tuesday. Saying that, moves below parity have been confined to around 100 pips or so, which may be a sign of support for the single currency over time.

What to watch for next week: Friday’s S&P PMI’s will be key, with most of the region below the key 50 threshold.


The latest US inflation report completely dominated proceedings this week. Market expectations for an energy-led decline had resulted in a strong rally amongst risk assets in the days leading up to Tuesday’s CPI release. In the end, softer energy prices did indeed help to turn the tide for headline inflation, with CPI (YoY/Aug) moving back from 8.5 to 8.3%. However, once you strip those food and energy prices out, the core reading continues to reflect broad-based increases for prices, with an unexpected increase from 5.9 to 6.3% on an annual basis. Markets had been hoping for a slightly lower increase of around 6.1%.

Whilst it is perhaps not surprising to see broader price increases occurring as businesses pass on higher costs through prices, as the benefits of lower energy costs take longer to filter through the system, markets were understandably left frustrated by the outcome. Markets quickly reacted to the news by raising the expectation levels for next week’s FOMC meeting, with some analysts calling for a whopping 100bps hike from the Fed. Given that we are currently in the middle of the Fed’s self-imposed ‘quiet period’ which is standard practice as we approach every FOMC meeting, our only clue may be if there is another timely ‘leak’, so that markets can be in place to price in any larger hike. However, 75bps remains the base case scenario until such time.

As for the greenback, well inflation saved the dollar, and having struggled ahead of Tuesday with the dollar index (DXY) recently moving from a cycle high at over 110.00 to under 108.00, the dollar made strong gains, culminating in a jump back to 109.50. Given the BoJ’s commitment to QQE, USD/JPY remains extremely volatile, with the pair bouncing between 142.00 and 145.00, at times extremely quickly. Recent attempts at verbal intervention from the BoJ may succeed in frustrating dollar bulls on the day, although until such time as either; a) the US economy hits the buffers, or b) Japan abandon QQE, the trend for USD/JPY is still likely to remain bullish. Interestingly enough, just a few hours after the FOMC meeting we get the latest BoJ meeting, which could see those interest rate differentials between the US and Japan widen even further.

What to watch for next week: FOMC meeting.


After last week’s 75bps rate hike from the BoC, this week has been a virtual data vacuum for keynote Canadian economic data, leaving the Loonie to be driven by the forces of the opposing side amongst CAD crosses. USD/CAD played to the same tune as the other dollar majors, beginning the week by moving sharply lower, and breaking back under 1.3000 for the first time since the end of August, and then succumbing to that stronger greenback, moving back over 1.3200 by yesterday’s (Thurs) close.

For USD/CAD, 1.3200 looks an interesting level, as it has managed to break the greenback’s advances on several occasions since the beginning of the month, and represents the top of the cycle that the greenback will need to bust if it has serious intentions to appreciate further over time.

Next week is a completely different story, with the latest Canadian inflation report and Retail Sales both set for release. They say that when the US sneezes, Canada catches a cold, so that higher US inflation reading (see USD) may well be replicated next week in Canada, despite July’s reading dropping back from over 8% to 7.6%. Of course, the higher the inflation, the stronger those rate hikes will likely be from the BOC going forward. All eyes remain on inflation again.

What to watch for next week: Inflation, Retail Sales


The latest Australian jobs report saw employment bouncing back, after the surprise decline in the previous month. With 33.5k gains, they were a smidgeon under expectations of around 35K, but almost completely eradicating the 40.9k decline from the previous month. There was a slight pop higher in the overall unemployment rate, which moved from 3% to 3.5%, but remains very close to the 48 -year low, which was set last month. Overall unfilled vacancies have been estimated at 480,500, also highlighting how there remains one vacancy for every person unemployed. Before COVID, that figure was more than three unemployed workers for every vacancy. This all clearly highlights the resilience of the Australian labour market, despite rising interest rates in Australia.

There was also some pleasing news in New Zealand, after the latest growth figures surprised to the upside, with New Zealand avoiding a technical recession, after growth reached 1.7% in Q2, reversing the 0.2% decline in Q1. Much of that increase can be attributed to the easing of COVID measures, with increased spending on travel and leisure. The services sector, which accounts for around two-thirds of the economy, saw gains of 2.7%.

Both AUD/USD and NZD/USD unwound their gains from the earlier part of the week, with the former slipping back to 0.670 having breached 0.6900 at one point, and the latter moving back below 0.6000, having looked like breaking above 0.6200 on both Monday and Tuesday.

What to watch for next week: RBA minutes, NZ Exports/Imports and Trade Balance.


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